TIDMSLI
30 April 2021
STANDARD LIFE INVESTMENTS PROPERTY INCOME TRUST LIMITED
LEI: 549300HHFBWZRKC7RW84
RESULTS IN RESPECT OF THE YEARED 31 DECEMBER 2020
2020 Financial Review
* Financial Resources of £55 million as at 31 December 2020 (2019: £37
million) available for investment to enhance earnings in the form of the
Company's low cost revolving credit facility.
* Low Loan to Value of 23.0% (2019: 24.6%) as at year end compared to
Association of Investment Companies ("AIC") peer group average of 31.0%.
* Dividends paid of 3.808p in the year (2019: 4.76p). This equates to 80% of
the level paid in 2019. Dividends were reduced in the year as rent
collection fell due to COVID-19. Dividends paid in 2020 equated to a yield
of 6.3% based on the share price as at 31 December 2020 compared to FTSE
Index yield of 3.4% and the FTSE All-Share REIT Index yield of 3.1%.
* NAV total return of -4.6% (2019: 4.1%) as valuations came under pressure,
particularly in the first half of the year, due to COVID-19. NAV has
outperformed AIC peer group over longer term delivering a total return of
140.2% compared to AIC peer group total return of 32.4% over 10 years.
* Share price total return of -29.8% (2019: 18.0%) as sentiment towards the
UK commercial real estate sector was negatively impacted by COVID-19. The
share price has delivered strong returns over the longer terms with a share
price total return over 10 years of 70.3% compared to the AIC peer group of
10.8%.
* Share buybacks totalling £6m as at 23 April 2021 at significant discounts
to NAV which are accretive to both NAV performance and earnings.
2020 Portfolio Review
* Portfolio total return of -1.8% (2019: 4.8%) marginally below that of the
benchmark return of -1.6% (2019: 1.3%) as both capital and income returns
were impacted by COVID-19.
* Rent collection for 2020 of 93.6% of rent due (2019: 99%) as tenant base,
geared towards Industrials, proved resilient in a COVID-19 environment.
* Occupancy rate of 91.7% (2019: 93.4%) compares favourably to the MSCI
benchmark rate of 90.8% (2019: 92.4%).
* A total of 15 lease renewals and restructurings were undertaken, securing £
2,587,491 pa in rent, and a total of 8 lettings securing £890,369pa
* 5 rent reviews were settled with uplifts in rent, securing an additional £
58,256pa (an average increase of 19% on previous rent).
* In 2020 we completed our largest solar PV scheme to date; a 918 kWp scheme
in Sandy to supply electricity to our occupier Flamingo Flowers. The
Company now has 6 operational PV schemes totalling 1.2 MWp, and has another
20 schemes in various stages of implementation.
* Portfolio well positioned: Portfolio is well positioned towards sectors
forecast to outperform by our Investment Manager with a 48.2% (2019: 51.2%)
weighting in Industrials (MSCI benchmark: 35.1%, 2019: 30.7%).
PERFORMANCE SUMMARY
2020 2019
Earnings and Dividends
IFRS earnings per share (3.88) 3.98
EPRA earnings per share (p) (excluding capital items & swap 4.10 4.76
movements)*
Dividends declared per ordinary share (p) 3.808 4.76
Dividend cover (%) 108 100
Dividend yield (%)** 6.3 5.2
FTSE All-Share Real Estate Investment Trusts Index Yield (%) 3.1 3.9
FTSE All-Share Index Yield (%) 3.4 4.1
Ongoing Charges***
As a % of average net assets including direct property costs 2.0 2.0
As a % of average net assets excluding direct property costs 1.2 1.2
Capital Values & Gearing 31 December 31 December Change
2020 2019 %
Total assets (£million) 459.6 505.8 (9.1)
Net asset value per share (p) (note 21) 82.0 89.9 (8.8)
Ordinary Share Price (p) 60.0 91.0 (34.1)
Premium/(Discount) to NAV (%) (26.8) 1.2
Loan to Value (%)? 23.0 24.6
Total Return 1 year % 3 year % 5 year % 10 year %
return return return return
NAV? (4.6) 8.8 30.0 140.2
Share Price? (29.8) (24.0) (7.6) 70.3
FTSE All-Share Real Estate Investment Trusts Index (16.2) (4.1) 0.2 95.2
FTSE All-Share Index (9.8) (2.7) 28.5 71.9
Property Returns & Statistics (%) 31 December 31 December
2020 2019
Property income return 4.9 5.2
MSCI Benchmark income return 4.7 4.7
Property total return (1.8) 4.8
MSCI Benchmark total return (1.6) 1.3
Void rate 8.3 6.6
* Calculated as profit for the period before tax (excluding capital items &
swaps costs) divided by weighted average number of shares in issue in the
period. EPRA stands for European Public Real Estate Association.
** Based on dividend paid of 3.808p and the share price at 31 December 2020 of
60.0p.
*** Calculated as investment manager fees, auditor's fees, directors' fees and
other administrative expenses divided by the average NAV for the year.
? Calculated as bank borrowings less all cash as a percentage of the open
market value of the property portfolio as at the end of each year.
? Assumes re-investment of dividends excluding transaction costs.
Sources: Aberdeen Standard Investments, MSCI.
STRATEGIC REPORT - CHAIRMAN'S STATEMENT
BACKGROUND
The last 12 months have been among the most tumultuous in modern times. The
tragic human impact of COVID-19 has touched every country across the world and
the economic impact will be felt for years to come in the form of much higher
state borrowing which, at some point, will have to be repaid. The roll-out of
the vaccines has provided some much needed hope, particularly in the UK where
the death toll per capita has been one of the highest in the world. New
variants allowing, vaccine rollouts should result in lockdowns continuing to be
eased and more normality returning to everyday life. Two other events that
would normally have been the most significant in any other year, namely the
Brexit deal agreed between the UK and the EU and the election of a new
President in the United States, should also decrease the political uncertainty
that has been so evident in recent years.
REAL ESTATE MARKET
The UK Commercial real estate market is linked to the performance of the UK
economy. The fact that the UK economy shrank by the largest amount in over 300
years gives a context in which to view the overall performance of the
commercial real estate market. With limited investment transactions, rising
capitalisation yields and falling rental values in many sectors, the MSCI
benchmark (UK Monthly Index Funds Quarterly Property Index) recorded a total
return of -1.6% with a capital return of -6.1% in 2020. The divergence across
sectors has been marked with COVID-19 accelerating trends that were already
evident before the pandemic with the industrial sector delivering a total
return of 8.6% as the move towards online retail continued apace. This trend,
and the fact most shops could not physically open for large parts of the year,
resulted in the retail sector returning -11.5% in 2020.
The 'Other' sector, a large component of which is leisure, also came under
pressure as restaurants, pubs and cinemas closed through the various lockdowns
returning -7.5%. Finally, while the death of the office may be overstated,
office values came under pressure resulting in a total return of -1.8%.
A key focus across the industry has been rent collection. The various lockdowns
have impacted detrimentally the ability of some tenants to pay rent which in
turn has resulted in a number of listed property REITs reducing dividends. The
main exception being those that have tenants purely from the logistics or
supermarket sectors, two sectors that have fared well in the COVID-19
environment.
PORTFOLIO AND CORPORATE PERFORMANCE
Against this background the performance of the portfolio was a tale of two
halves. Values fell in the first six months of the year when COVID-19 first
appeared, effectively closing the economy driving valuations down with material
uncertainty clauses becoming prevalent across the valuation industry. However,
the portfolio rebounded strongly in the second half of the year as property
fundamentals came to the fore. This resulted in the portfolio producing a total
return of -1.8%, marginally below that of the benchmark. This was made up of an
income return of 4.9% being offset by a capital return of -6.4%. The Investment
Manager's report provides a full analysis of the portfolio performance.
This portfolio performance contributed to a NAV total return of -4.6% in the
year as the NAV was also impacted by gearing and the negative movement in the
Company's swap liability of £1.5 million.
The swap liability now stands at £3.7 million which will reduce to zero as the
fixed term loan approaches maturity in 2023.
The total return to shareholders in the period was -29.8% as the share price
fell due to sentiment towards the commercial real estate industry deteriorating
over concerns around rent collection levels and reduced dividends and asset
values. The discount at which the Company's shares traded to NAV stood at 25.5%
as at 31 March which is broadly in-line with other diversified REITs. Given
these types of discount levels during the year the Board took the investment
decision to undertake a share buyback programme, and as at 23 April 2021 has
bought back £6 million of shares at an average discount of 26%, thereby
increasing both the NAV and earnings per share.
These share buybacks contrast sharply with the pre COVID-19 world in February
2020 when the premium rating of the Company allowed it to issue 1 million new
shares at a price of over 6% above NAV.
Whilst in the short term returns have been impacted by COVID-19, the Company
continues to have a strong longer term track record with a NAV total return of
140.2% and share price total return of 70.3% over ten years to end of 2020
compared to the equivalent AIC peer group total return of 32.4% and 10.8%
respectively. Open ended property funds returned 47.2% over the same period,
with these funds having been closed for redemption for a significant period of
time during the pandemic.
RENT COLLECTION AND DIVIDS
Throughout the period of the pandemic, the Board and its Investment Manager
have been very conscious of the Company's Environmental, Social and Governance
("ESG") obligations as a responsible landlord. The Company is acutely aware of
the pressure that lockdown has had on our tenants' businesses and has worked
with tenants to agree rental deferments, rent free periods in exchange for
amended lease terms (generally an extension of leases) and, in some extreme
cases, rental write offs (generally with the smallest tenants who have no means
of paying). At the close of business on 31 March 2021, the Company had received
payments reflecting 93.6% of rents billed in relation to 2020. Further detail
on ESG, rent collection and interaction with tenants is included in the
Investment Manager's Report.
COVID-19 has placed great strain on the revenue accounts of a number of
property companies resulting in many postponing dividends for a period of time
until the outlook for rent collection became clearer. The Board is very
cognisant of the importance of income to our shareholders. Throughout the
period of the pandemic the Company has continued to pay a divided with payments
of 3.808 pence per share being paid in 2020, 80% of the level paid in 2019. In
addition to the fourth interim dividend paid in February 2021 and in-line with
the REIT rules, the Company has announced it will also pay a fifth interim
dividend in relation to 2020 of 0.381p on 18 May 2021 to shareholders on the
register at 30 April 2021.
The Board will continue to monitor the progress of the vaccine roll out on
lockdown restrictions, rent collection and hence earnings on a quarterly basis.
Furthermore, the Company in future will need to acquire properties that are
well equipped and relevant for a post COVID world, which will tend to offer
more modest income yields. A key aim, barring any further lockdowns, is to
increase the dividend back to a level that is sustainable given the current
portfolio as well as future investment and letting activity.
FINANCIAL RESOURCES & PORTFOLIO ACTIVITY
The Company is in a strong financial position. At the year end, the Company had
a prudent Loan to Value ("LTV") of 23.0% compared to a peer group average of
31.0% with only the £110 million term loan drawn. The quarterly loan covenants
for the whole of 2020 were also comfortably met with rental income having to
fall by 77% and property values by 54% from year end levels before covenants
are endangered. In addition, the Company has significant financial resources
available for investment comprising all £55 million of its flexible, low cost
revolving credit facility. Post year end the sale of £10.4m of assets also
gives the Company additional firepower. In terms of the utilisation of these
resources, the Company will look to invest in assets that fit the portfolio
strategy including consideration of assets such as forestry that will help
offset the Company's carbon footprint. In addition, it will continue to
selectively buy back shares at discount levels the Board believe represents a
good use of capital.
ANNUAL GENERAL MEETING ("AGM)
The Board has been monitoring closely the ongoing impact of the Covid-19
pandemic upon the arrangements for the Company's upcoming AGM on 16 June 2021.
At the time of writing, elements of the National Lockdown remain in place and
shareholder attendance at AGMs is not legally permissible. Therefore, in order
to provide certainty, whilst encouraging and promoting interaction and
engagement with our shareholders, the Board has decided to hold an interactive
Online Shareholder Presentation which will be held at 11.00 a.m. on Friday, 4
June 2021. At the presentation, shareholders will receive updates from the
Chairman and Manager and there will be the opportunity for an interactive
question and answer session. Following the online presentation, shareholders
will still have time during which to submit their proxy votes prior to the AGM
and I would encourage all shareholders to lodge their votes in advance in this
manner. Further information on how to register for the event can be found on
https://www.workcast.com/register?cpak=4594420195653739.
The AGM on 16 June 2021 will, by necessity, be a functional only closed AGM,
and it will be held at 09:00 at the offices of Dickson Minto WS at 16 Charlotte
Square, Edinburgh EH2 4DF. Arrangements will be made by the Company to ensure
that the minimum number of shareholders required to form a quorum will attend
the meeting in order that the meeting may proceed and the business be
concluded. The Board considers these arrangements to be in the best interests
of shareholders given the current circumstances.
The Board strongly discourages shareholders from attending the AGM and entry
will be refused if Government guidance so requires or if the Chairman considers
it to be necessary. Instead, shareholders are encouraged to exercise their
votes in respect of the meeting in advance. Any questions from shareholders who
are unable to join the Online Shareholder Presentation may be submitted to the
company secretary at: Property.Income@aberdeenstandard.com. The Board and/or
the Manager will seek to respond to all such questions received either before,
or after the AGM.
On behalf of the Board I should like to thank shareholders in advance for their
co-operation and understanding and I very much look forward to presenting to as
many shareholders as possible at the Online Shareholder Presentation.
OUTLOOK
The COVID-19 pandemic has resulted in the UK suffering an unprecedented
economic shock, with GDP falling by 9.9% in 2020. However, assuming the vaccine
programme continues to be successful and is not thrown off course by variants
of the disease necessitating another lockdown, the economy should grow strongly
in 2021. Our Investment Manager forecasts GDP growth of 6.2% on that basis.
From a real estate perspective, overall the market is not expected to perform
as well as the wider economy and returns will be heavily polarized between
sectors and even within sectors. COVID-19 has accelerated the structural trend
towards online retail, benefitting industrials and away from the high street
and shopping centres. As lockdown is eased and shops begin to reopen this trend
will moderate but it is unlikely to reverse over the medium term given the
convenience of online shopping. Moving onto offices, there continues to be a
place for offices in any diversified portfolio, but in the future it is likely
that offices will act more as hubs for collaboration with occupiers looking for
more modern buildings in prime locations that promote wellbeing.
This, in turn, will result in older, more secondary offices falling out of
favour. Leisure should recover as lockdown eases and has the potential to
perform relatively well when the public gain the confidence to go back to
restaurants, pubs and cinemas.
SLIPIT is structurally well aligned to take advantage of the trends referred to
above. The portfolio is significantly overweight to the industrial sector with
a weighting of 48% at the year end with only 12% of the portfolio being in
retail at the same date. The Company has a strong balance sheet with relatively
low gearing and significant financial resources to invest into both our
existing portfolio, such as the modernisation of our largest office investment
at Hagley Road in Birmingham, as well as new investment opportunities and NAV
accretive share buybacks. In addition, the Company continues to pay out an
attractive dividend to shareholders in a world where low interest rates will
continue to be the norm.
Overall, your Company has strong foundations at both a portfolio and corporate
level which has enabled it to meet the challenges posed by the current
difficult situation as well as being relatively well positioned for the future.
James Clifton-Brown Chairman
29 April 2021
STRATEGIC REPORT - STAKEHOLDER ENGAGEMENT
This section, which serves as the Company's section 172 statement, explains how
the Directors have promoted the success of the Company for the benefit of its
members as a whole during the financial year to 31 December 2020, taking into
account the likely long term consequences of decisions, the need to foster
relationships with all stakeholders and the impact of the Company's operations
on the environment, in accordance with the AIC Code on Corporate Governance.
THE ROLE OF THE DIRECTORS
The Company is a REIT and has no executive directors or employees and is
governed by the Board of Directors. Its main stakeholders are Shareholders, the
Investment Manager, Tenants, Service Providers, Debt Providers, the Environment
and the Community.
As set out in the Corporate Governance Report, the Board has delegated
day-to-day management of the assets to the Investment Manager and either
directly or through the Investment Manager, the Company employs key suppliers
to provide services in relation to property management, health & safety,
valuation, legal and tax requirements, auditing, depositary obligations and
share registration, amongst others. All decisions relating to the Company's
investment policy, investment objective, dividend policy, gearing, corporate
governance and strategy in general are reserved for the Board. The Board meets
quarterly, with numerous other ad-hoc meetings, and receives full information
on the Company's performance, financial position and any other relevant
information. At least once a year, the Board also holds a meeting specifically
to review the Group's strategy.
The Board regularly reviews the performance of the Investment Manager, and its
other service providers, to ensure they manage the Company, and its
stakeholders, effectively and that their continued appointment is in the best
long term interests of the stakeholders as a whole.
The Board also reviews its own performance annually to ensure it is meeting its
obligations to stakeholders. Engagement with key stakeholders is considered
formally as part of the annual evaluation process.
STRATEGIC ACTIVITY DURING THE YEAR
Notable transactions where the interests of stakeholders were actively
considered by the Board during the year, and subsequently, include:
. All decisions relating to the Company's dividends - the Board recognised
the importance of dividends to its shareholders especially when the COVID-19
crisis had forced many companies, across multiple sectors of the economy, to
cancel or suspend their dividends. Despite some disruption to cash collection
during the financial year, the Company continued to pay out a dividend during
the pandemic with payments made in 2020 totalling 3.8p per share which equates
to 80% of the 2019 level.
. Issuance and buyback of shares - in February 2020, the Board approved the
issue of 1 million new ordinary shares at a 6% premium to NAV with the proceeds
used to reduce the Company's borrowings and was invested in accordance with the
Company's investment policy. During the year, the Company bought back 2,548,997
ordinary shares into treasury. The Board believes that investment by the
Company in its own shares at the levels of discount to net asset value during
the year and subsequently offers an attractive investment opportunity for its
shareholders given the financial resources the Company has at its disposal.
. Ongoing investment activity - the Company, with oversight from the Board,
undertook strategic activity in selling a small non air conditioned office in
Derby following a regear of the lease and a standalone retail warehouse let to
Smyth's Toys. The most significant sale (in late December) was of four
multi-let industrial estates for £37.75m. Industrial is a favoured sector but
the Company wanted to realise the positive performance delivered on these
assets recognising that future performance within the industrial sector is
likely to be more polarised, with logistics performing better than small
multi-let units. All of these sales reflected the Investment Manager's changing
expectations for some assets following COVID-19. The sale proceeds were used to
repay the £35m drawn under the Revolving Credit Facility (RCF) and also meant
the Company had resources for investment and share buy backs.
The Board's primary focus is to promote the long term success of the Company
for the benefit of its stakeholders as a whole. The Board oversees the delivery
of the investment objective, policy and strategy, as agreed by the Company's
shareholders. As set out above, the Board considers the long term consequences
of its decisions on its stakeholders to ensure the long term sustainability of
the Company.
SHAREHOLDERS
Shareholders are key stakeholders and the Board places great importance on
communication with them. The Board welcomes all shareholders' views and aims to
act fairly to all shareholders. The Board believes that the Company's
shareholders seek an attractive and sustainable level of income, the prospect
of growth of income and capital in the longer term, a well-executed sustainable
investment policy, responsible capital allocation and value for money.
The Investment Manager and Company's Broker regularly meet with shareholders,
and prospective shareholders, to discuss Company initiatives and seek feedback.
The views of shareholders are discussed by the Board at every Board meeting,
and action taken to address any shareholder concerns. The Investment Manager
provides regular updates to shareholders and the market through the Annual
Report, Half-Yearly Report, Quarterly Net Asset Value announcements, Company
Factsheets and its website.
The Chair offers to meet with key shareholders at least annually, and other
Directors are available to meet shareholders as required. This allows the Board
to hear feedback directly from shareholders on the Company's ongoing strategy.
Despite the challenges arising from COVID-19, the Investment Manager undertook
several meetings with large shareholders to provide reports on the progress of
the Company and receive feedback, which was then provided to the full Board.
The Company's AGM provides a forum, both formal and informal, for shareholders
to meet and discuss issues with the Directors and Investment Manager of the
Company. The Board would ordinarily encourage as many shareholders as possible
to attend the Company's AGM to engage directly with the Board. The Board has
been monitoring closely the ongoing impact of the COVID-19 pandemic upon the
arrangements for the Company's upcoming AGM on Wednesday, 16 June 2021. At the
time of writing, elements of the National Lockdown remain in place and
shareholder attendance at AGMs is not legally permissible. Therefore, in order
to provide certainty, whilst encouraging and promoting interaction and
engagement with the Company's shareholders, the AGM will be a closed meeting,
with the minimum representatives present to form a quorum.
However, as set out in the Chairman's statement, the Board has decided to hold
an interactive Online Presentation and Shareholder Question and Answer Session
with the Manager which will be held at 11.00am on Friday 4 June 2021. Following
the online presentation, shareholders will still have time during which to
submit their proxy votes prior to the AGM and the Board encourages all
shareholders to lodge their votes in advance. Full details on how to register
for the Q&A can be found in the Chairman's statement. Shareholders are
encouraged to submit questions in advance of the Q&A by email to:
property.income@aberdeenstandard.com.
TENANTS
Another key stakeholder group is that of the underlying tenants that occupy
space in the properties that the Company owns. The Investment Manager works
closely with tenants to understand their needs through regular communication
and visits to properties.
The Board believes that tenants benefit from a trusting and long term working
relationship with the Investment Manager, sustainable buildings and tenancies,
value for money and a focus on the community, health & safety and the
environment.
The Investment Manager consults with tenants and, on the Board's behalf,
invests in our buildings to improve the quality and experience for our
occupiers as well as reduce voids and improve values, helping to produce
stronger returns. The Board receives reports on tenant engagement and
interaction at every Board meeting. The Board also expects the Investment
Manager to undertake extensive financial due diligence on potential tenants to
mitigate the risk of tenant failure or inability to let properties.
During the COVID-19 pandemic, the Company's Investment Manager has worked
closely with tenants to understand their needs. The Board believes that this is
a crisis that impacts on individuals as much as companies and takes the Social
aspects of ESG very seriously. The Board firmly believes that by helping
tenants now and building relationships the Company will have better occupancy
over future months and years, which will in turn benefit the Company's cash
flow.
DEBT PROVIDER
The Company has a term loan facility and revolving credit facility with The
Royal Bank of Scotland International Limited ("RBSI"). RBSI seeks responsible
portfolio management and ongoing compliance with the Company's loan covenants.
The Company maintains a positive working relationship with RBSI and provides
regular updates on business activity and compliance with its loan covenants.
THE COMMUNITY AND THE ENVIRONMENT
The Board and the Investment Manager are committed to investing in a
responsible manner. There are a number of geopolitical, technological, social
and demographic trends underway globally that can, and do, influence real
estate investments - many of these changes fall under the umbrella of ESG
considerations. As a result, the Investment Manager fully integrates ESG
factors into its investment decision making and governance process.
The Board has adopted the Investment Manager's ESG Policy and associated
operational procedures and is committed to environmental management in all
phases of the investment process.
The Company aims to invest responsibly, to achieve environmental and social
benefits alongside returns. By integrating ESG factors into the investment
process, the Company aims to maximise the performance of the assets and
minimise exposure to risk.
INVESTMENT MANAGER
The Chairman's Statement and Investment Manager's Report detail the key
investment decisions taken during the year and subsequently. The Investment
Manager has continued to manage the Company's assets in accordance with the
mandate provided by shareholders, with the oversight of the Board. The Board
receives presentations from the Investment Manager at every Board meeting to
help it to exercise effective oversight of the Investment Manager and the
Company's Strategy. The Board formally reviews the performance of the
Investment Manager, and the fees it receives, at least annually.
OTHER SERVICE PROVIDERS
The Board via the Management Engagement Committee also ensures that the views
of its service providers are heard and at least annually reviews these
relationships in detail. The aim is to ensure that contractual arrangements
remain in line with best practice, services being offered meet the requirements
and needs of the Company and performance is in line with the expectations of
the Board, Investment Manager and other relevant stakeholders. Reviews will
include those of the company secretary, broker, share registrar and audit.
STRATEGIC REPORT - STRATEGIC OVERVIEW
OBJECTIVE
The objective, and purpose, of the Group is to provide shareholders with an
attractive level of income together with the prospect of income and capital
growth.
INVESTMENT POLICY AND BUSINESS MODEL
The Board intends to achieve the investment objective by investing in a
diversified portfolio of UK commercial properties. The majority of the
portfolio will be invested in direct holdings within the three main commercial
property sectors of retail, office and industrial although the Group may also
invest in other commercial property such as hotels, nursing homes and student
housing.
Investment in property development and investment in co-investment vehicles,
where there is more than one investor, is permitted up to a maximum of 10% of
the property portfolio.
In order to manage risk, without compromising flexibility, the Board applies
the following restrictions to the property portfolio, in normal market
conditions:
. No property will be greater by value than 15% of total assets.
. No tenant (excluding the Government) will be responsible for more than
20% of the Group's rent roll.
. Gearing, calculated as borrowings as a percentage of gross assets, will
not exceed 65%. The Board's current intention is that the Group's Loan to Value
ratio (calculated as borrowings less all cash as a proportion of property
portfolio valuation) will not exceed 45%.
As part of its strategy, the Board has contractually delegated the management
of the property portfolio, and other services, to Aberdeen Standard Fund
Managers Limited ("the Investment Manager").
STRATEGY
Each year the Board undertakes a strategic review, with the help of its
Investment Manager and other advisers.
The overall intention is to continue to distribute an attractive income return
alongside growth in the NAV and a good overall total return relative to the
peer group.
At the property level, it is intended that the Group remains primarily invested
in the commercial sector, while keeping a watching brief on other classes such
as student accommodation and care homes as well as other sectors which will
enable the Company to meets its environmental targets.
The Group is principally invested in office, industrial and retail properties
and intends to remain so but will keep alert to other opportunities. In
addition consideration will be given to acquiring assets that will enable the
Company to meet its ESG objectives.
The Board's preference is to buy into good, but not necessarily prime,
locations, where it perceives there will be good continuing tenant demand, and
to seek out properties where the asset management skills of the Investment
Manager can be used to beneficial effect. The Board will continue to have very
careful regard to tenant profiles.
As part of this investment strategy, the Group recognises that tenants are a
key stakeholder and aims to foster a culture whereby the experience of tenants
is seen as paramount to the future success of the Group. The Investment Manager
works closely with tenants to understand their needs through regular
communication and visits to properties.
Where required, and in consultation with tenants, the Group refurbishes and
manages the owned assets to improve the tenants' experience, including
consideration of health & safety and environmental factors, with the aim being
to generate greater tenant satisfaction and retention and hence lower voids,
higher rental values and stronger returns.
The Board continues to seek out opportunities for further, controlled growth in
the Group.
The Group continues to maintain a tax efficient structure, having migrated its
tax residence to the UK and becoming a UK REIT on 1 January 2015.
THE BOARD
As at 31 December 2020, the Board consisted of a non-executive Chairman and
four non-executive Directors. The names and biographies of those directors who
held office at 31 December 2020 and at the date of this report appear in the
Annual Report and indicate their range of property, investment, commercial and
financial experience. There is also a commitment to achieve the proper levels
of diversity.
Robert Peto stepped down from the Board on 25 August 2020 and was succeeded as
Chair by James Clifton-Brown. Sarah Slater succeeded James as the Chair of the
Property Valuation Committee.
KEY PERFORMANCE INDICATORS
The Board meets quarterly and at each meeting reviews performance against a
number of key measures which are considered to be alternative performance
measures ("APMs"). These APMs are in line with recognised industry performance
measures both in the Real Estate and Investment Trust industry and help to
assess the overall performance of the portfolio and the wider Group:
Property income and total return against the Quarterly Version of the MSCI
Balanced Monthly Funds Index ("the Index").
The Index provides a benchmark for the performance of the Group's property
portfolio and enables the Board to assess how the portfolio is performing
relative to the market. A comparison is made of the Group's property returns
against the Index over a variety of time periods (quarter, annual, three years,
five years and ten years).
Property voids.
Property voids are unlet properties. The Board reviews the level of property
voids within the Group's portfolio on a quarterly basis and compares the level
to the market average, as measured by the IPD. The Board seeks to ensure that,
when a property becomes void, the Investment Manager gives proper priority to
seeking a new tenant to maintain income.
Rent collection dates.
The Board assesses rent collection by reviewing the percentage of rents
collected within 21 days of each quarter end.
Net asset value total return.
The net asset value ("NAV") total return reflects both the net asset value
growth of the Group and also the dividends paid to shareholders. The Board
regards this as the best overall measure of value delivered to shareholders.
The Board assesses the NAV total return of the Group over various time periods
(quarter, annual, three years and five years) and compares the Group's returns
to those of its peer group of listed, closed-ended property investment
companies.
Premium or discount of the share price to net asset value.
The Board closely monitors the premium or discount of the share price to the
NAV and believes that a key driver for the level of the premium or discount is
the Group's long-term investment performance. However, there can be short-term
volatility in the premium or discount and the Board takes powers at each Annual
General Meeting ("AGM") to enable it to issue or buy back shares with a view to
limiting this volatility.
Dividend per share and dividend cover.
A key objective of the Group is to provide an attractive, sustainable level of
income to shareholders and the Board reviews, at each Board meeting, the level
of dividend per share and the dividend cover, in conjunction with detailed
financial forecasts, to ensure that this objective is being met and is
sustainable.
The Board considers the performance measures both over various time periods and
against similar funds.
A record of these measures is disclosed in the Financial and Property
Highlights, Chairman's Statement and Investment Manager's Report.
PRINCIPAL RISKS AND UNCERTAINTIES
The Board ensures that proper consideration of risk is undertaken in all
aspects of the Group's business on a regular basis. During the year, the Board
carried out an assessment of the risk profile of the Group, including
consideration of risk appetite, risk tolerance and risk strategy. The Board
regularly reviews the principal and emerging risks of the Group, seeking
assurance that these risks are appropriately rated and ensuring that
appropriate risk mitigation is in place.
The Group's assets consist of direct investments in UK commercial property. Its
principal risks are therefore related to the commercial property market in
general, but also the particular circumstances of the properties in which it is
invested, and their tenants. The Board and Investment Manager seek to mitigate
these risks through a strong initial due diligence process, continual review of
the portfolio and active asset management initiatives. All of the properties in
the portfolio are insured, providing protection against risks to the properties
and also protection in case of injury to third parties in relation to the
properties.
The overarching risk that has emerged is COVID-19, the global pandemic that has
impacted all areas of society in the UK and abroad. This pandemic has caused
significant loss of life and global economic disruption. It arguably affects
all areas of risk on which the Company reports and has increased the risk
profile of the Company. In the section following, particular consideration has
been given to how COVID-19 is impacting on the specific risks that are reviewed
at each Board meeting.
The Group and its objectives become unattractive to investors, leading to
widening of the discount.
This risk is mitigated through regular contact with shareholders, a regular
review of share price performance and the level of the discount or premium at
which the shares trade to net asset value and regular meetings with the Group's
broker to discuss these points and address any issues that arise. COVID-19 has
increased the volatility of the Company's share price and, reflecting wider
market sentiment, has resulted in the Company's shares trading at a discount to
prevailing NAV of 25.5% as at 31 March 2021, in-line with other diversified
peers in the Company's AIC peer group.
Net revenue falls such that the Group cannot sustain its level of dividend, for
example due to tenant failure or inability to let properties.
This risk is mitigated through regular review of forecast dividend cover and of
tenant mix, risk and profile. Due diligence work on potential tenants is
undertaken before entering into new lease arrangements and tenants are kept
under constant review through regular contact and various reports both from the
managing agents and the Investment Manager's own reporting process.
Contingency plans are put in place at units that have tenants that are believed
to be in financial trouble. The Group subscribes to the MSCI Iris Report which
updates the credit and risk ranking of the tenants and income stream, and
compares it to the rest of the UK real estate market.
An emerging risk in the year was the poor performance of the retail sector due
to a number of high profile administrations and store closures in this sector
as most retail units were closed for part of the year and into 2021.
The Group has partially mitigated this risk by having an underweight position
to the retail sector with only 11.7% exposure to this sector against the
benchmark weighting of 22.8% as at the end of December 2020.
The lockdown of many businesses as a result of COVID-19 has resulted in a
significant fall of rental collection rates. Rent collection for 2020 was 93.6%
resulting in a fall in EPRA earnings during the year. The Company reduced its
dividend to reflect this fall in rental levels and the continued uncertainty,
paying out a dividend that equated to 80% if its 2019 level.
Uncertainty or change in the macroeconomic environment results in property
becoming an undesirable asset class, causing a decline in property values.
This risk is managed through regular reporting from, and discussion with, the
Investment Manager and other advisers. Macroeconomic conditions form part of
the decision making process for purchases and sales of properties and for
sector allocation decisions.
The impact of COVID-19 on the UK economy has been severe with the largest fall
in GDP in over 300 years. This has impacted both property values and the
ability of tenants to pay rent. Assuming the vaccination programme works and
lockdown continues to be eased then UK GDP should grow strongly in the current
year. The impact of the trade deal with the EU will also require to be
monitored to ensure it does not have a negative impact on the UK economy.
Breach of loan covenants.
This risk is mitigated by the Investment Manager monitoring the loan covenants
on a regular basis and providing a quarterly certificate to the bank confirming
compliance with the covenants. Compliance is also reviewed by the Board each
quarter and there is regular dialogue between the Investment Manager and RBS,
the lending bank, on Group activity and performance. Throughout 2020 the loan
covenants were comfortably met. As at 31 December the Loan to Value Ratio
reported to RBS was 25% (limit of 60%) and interest cover of 678% (limit 175%).
Environmental.
Environmental risk is considered as part of each purchase and monitored on an
ongoing basis by the Investment Manager. However, with extreme weather events
both in the UK and globally becoming a more regular occurrence due to climate
change, the impact of the environment on the property portfolio and on the
wider UK economy is seen as an increasing risk.
Please see the Environmental, Social and Governance Policy section and the
Investment Manager's Report for further details on how the Company addresses
environmental risk, including climate change.
Other risks faced by the Group include the following:
. Strategic - incorrect strategy, including sector and property allocation
and use of gearing, could all lead to a poor return for shareholders.
. Tax efficiency - the structure of the Group or changes to legislation
could result in the Group no longer being a tax efficient investment vehicle
for shareholders.
. Regulatory - breach of regulatory rules could lead to the suspension of
the Group's Stock Exchange Listing, financial penalties or a qualified audit
report.
. Financial - inadequate controls by the Investment Manager or third party
service providers could lead to misappropriation of assets. Inappropriate
accounting policies or failure to comply with accounting standards could lead
to misreporting or breaches of regulations.
. Operational - failure of the Investment Manager's accounting systems or
disruption to the Investment Manager's business, or that of third party service
providers, could lead to an inability to provide accurate reporting and
monitoring, leading to loss of shareholder confidence.
. Cyber Risk - Business continuity or other risks to any of the Company's
service providers or properties, following a catastrophic event e.g. terrorist
attack, cyber-attack, power disruptions or civil unrest, leading to disruption
of service, loss of data etc.
The Board seeks to mitigate and manage all risks through continual review,
policy setting and enforcement of contractual obligations. It also regularly
monitors the investment environment and the management of the Group's property
portfolio, levels of gearing and the overall structure of the Group.
Details of the Group's internal controls are described in more detail in the
Corporate Governance Report in the Annual Report.
SOCIAL, COMMUNITY AND EMPLOYEE RESPONSIBILITIES
The Group has no direct social, community or employee responsibilities. The
Group has no employees and accordingly no requirement to report separately in
this area as the management of the portfolio has been delegated to the
Investment Manager. In light of the nature of the Group's business there are no
relevant human rights issues and hence there is no requirement for a human
rights policy. The Board, through its Investment Manager, does, however,
closely monitor the policies of its suppliers to ensure that proper provision
is in place.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE POLICY
Approach to ESG
The Company adopts the Investment Manager's policy and approach to integrating
ESG and this has been used as the basis for establishing the Company's ESG
objectives.
The Investment Manager views ESG as a fundamental part of its business. Whilst
real estate investment provides valuable economic benefits and returns for
investors it has - by its nature - the potential to affect environmental and
social outcomes, both positively and negatively.
The Investment Manager's approach is underpinned by the following three
over-arching principles:
. Transparency, Integrity and Reporting: being transparent in the ways in
which we communicate and discuss our strategy, approach and performance with
our investors and stakeholders.
. Capability and Collaboration: drawing together and harnessing the
capabilities and insights of our platforms, with those of our investment,
supply chain and industry partners.
. Investment Process and Asset Management: integrating ESG into decision
making, governance, underwriting decisions and asset management approach. This
includes the identification and management of material ESG risks and
opportunities across the portfolio.
Of particular focus is responding to climate change, both in terms of
resilience to climate impacts and in reducing emissions from the Company's
activities. The Investment Manager has recently published a framework for
achieving net-zero greenhouse gas emissions across the real estate assets it
manages and the Company is among the first to start this process, as outlined
in the Investment Manager's Report.
EPRA Sustainability Best Practice Recommendations Guidelines
We have adopted the 2017 EPRA Sustainability Best Practice Recommendations
Guidelines (sBPR) to inform the scope of indicators we report against. We have
reported against all EPRA sBPR indicators that are material to the Company. We
also report additional data not required by the EPRA sBPR where we believe it
to be relevant (e.g. like-for-like greenhouse gas emissions).
A full outline of the scope of reporting and materiality review in relation to
EPRA sBPR indicators is included in Appendix X which also provides disclosures
required under Streamlined Energy and Carbon Reporting (SECR).
Operational Performance Summary
The Investment Manager has processes in place to ensure operational
sustainability performance is monitored and actions are implemented to drive
continual improvement. The effect of COVID-19 on occupancy has had an impact on
energy consumption and greenhouse gas emissions. It is unfortunately not
possible to fully disaggregate this impact from improvement measures undertaken
at assets. The performance figures for 2020 should be viewed in this context.
Like-for-like landlord electricity and gas consumption reduced year-on-year
across the Company's assets, by 12% and 1% respectively. This helped drive a
17% reduction in like-for-like greenhouse gas emissions associated with
landlord-procured energy.
Full details of performance against material EPRA sBPR indicators are included
in the Annual Report.
2020 GRESB Assessment
The GRESB Assessment is the leading global sustainability benchmark for real
estate vehicles. The Company has been submitted to GRESB since 2012. In the
2020 assessment, the Company achieved a score of 62 and a two star rating. The
2020 GRESB assessment represented a major overhaul of the benchmark which
affected certain types of portfolio more than others and means comparisons with
previous years are not possible. Our focus on ESG, and in particular on
improving coverage of tenant data, will help improve the Company's GRESB score
in future years.
HEALTH & SAFETY
Alongside these environmental principles the Group has a health & safety policy
which demonstrates commitment to providing safe and secure buildings that
promote a healthy working/customer experience that supports a healthy
lifestyle. The Group, through the Investment Manager, manages and controls
health & safety risks as systematically as any other critical business activity
using technologically advanced systems and environmentally protective materials
and equipment. The aim is to achieve a health & safety performance the Group
can be proud of and allow the Group to earn the confidence and trust of
tenants, customers, employees, shareholders and society at large. The Board
reviews health & safety on a regular basis in Board meetings.
VIABILITY STATEMENT
The Board considers viability as part of its ongoing programme of financial
reporting and monitoring risk. The Board continually reviews the prospects for
the Company over the longer term taking into account the Company's current
financial position, its operating model, and the diversified constituents of
its portfolio. In addition the Board considers strong initial due diligence
processes, the continued review of the portfolio and the active asset
management initiatives. Given the above, the Board believes that the Company
has a sound basis upon which to continue to deliver returns over the long term.
In terms of viability, the Board has considered the nature of the Group's
assets and liabilities and associated cash flows and has determined that five
years is the maximum timescale over which the performance of the Group can be
forecast with a material degree of accuracy and so is an appropriate period
over which to consider the Group's viability.
The Board has also carried out a robust assessment of the principal and
emerging risks faced by the Group. The main risks which the Board considers
will affect the business model are: future performance, solvency, liquidity,
tenant failure leading to a fall in dividend cover and macroeconomic
uncertainty.
These risks have all been considered in light of the financial and economic
impact arising from COVID-19.
The Board takes any potential risks to the ongoing success of the Group, and
its ability to perform, very seriously and works hard to ensure that risks are
consistent with the Group's risk appetite at all times. In assessing the
Group's viability, the Board has carried out thorough reviews of the following:
. Detailed NAV, cash resources and income forecasts, prepared by the
Company's Investment Manager, for a five year period under both normal and
stressed conditions;
. Additional modelling that has been undertaken around the potential impact
of COVID-19 on rent collection, cash flow, dividend cover, Net Asset Value and
loan covenants;
. The Group's ability to pay its operational expenses, bank interest, tax
and dividends over a five year period;
. Future debt repayment dates and debt covenants, in particular those in
relation to LTV and interest cover;
. The ability of the Company to refinance its debt facilities in April
2023;
. Demand for the Company's shares and levels of premium or discount at
which the shares trade to NAV;
Views of shareholders; and
. The valuation and liquidity of the Group's property portfolio, the
Investment Manager's portfolio strategy for the future and the market outlook.
Despite the uncertainty in the UK regarding the ongoing impact of the COVID-19
pandemic, the Board has a reasonable expectation that the Group will be able to
continue in operation and meet its liabilities as they fall due over the next
five years. This assessment is based on the current financial position of the
Company, its performance track record and feedback it receives from
shareholders.
APPROVAL OF STRATEGIC REPORT
The Strategic Report comprises the Financial and Portfolio Highlights,
Performance Summary, Chairman's Statement, Strategic Overview and Investment
Manager's Report. The Strategic Report was approved by the Board and signed on
its behalf by:
James Clifton-Brown Chairman
29 April 2021
STRATEGIC REPORT - INVESTMENT MANAGER'S REPORT
MARKET REVIEW
2020 will be a year remembered by everyone. UK gross domestic product (GDP)
fell by 9.9%, the largest annual decline in output in 300 years. The effects of
the pandemic were far reaching, with no sector of the economy coming out
unscathed, including real estate.
Furthermore, the lockdown measures implemented at the end of 2020 are likely to
result in the economy shrinking by 4% in the first quarter of 2021. Assuming
the vaccine roll out continues smoothly, the UK economy is expected to see
growth return only in the second half of 2021.
Returns in the UK real estate market turned negative in 2020, with a total
return of -2.3% (per the MSCI Quarterly Index), the first negative calendar
year since 2008. As was the case pre-pandemic, returns at the sector level
remained highly polarised with industrials and residential the only two sectors
to post positive total returns during 2020. The industrial sector was the stand
out performer, recording another strong year with returns of 9.2%, aided by
capital value growth of 4.6%. Both South East and rest of UK industrials had a
strong 2020, with total returns of 10.1% and 7.6% respectively. The retail
sector continued to weigh on all commercial property returns with a total
return of -12.4% and values falling by -17.1% over the course of the year. At
-1.0% in Q4, the office sector saw its weakest quarterly return since Q3 2016,
contributing an annual return of -1.7%.
The fourth quarter rally in 2019 for the FTSE UK REIT index was quickly unwound
in the first quarter of 2020 as the pandemic took hold. During the first
quarter of 2020, the index recorded a total return of -27%, and despite a late
vaccine relief rally in the final months of 2020, the FTSE UK REIT index
delivered a total return of -16.2% for the full year, with the FTSE All-Share
Index returning -9.8%. The hierarchy of favoured sectors remained broadly the
same, with the variance in NAVs between the most and least favoured sectors
becoming more pronounced. Industrial names benefited from a clear acceleration
in structural shifts towards online retailing, largely to the detriment of
retail REITs. As a result, pricing held up better for the former, whereas
pricing for retail REITs continued to trade at deep discounts to NAV. With
uncertainty surrounding the outlook for the office occupational market, London
office developers continued to trade at discounts to NAV.
COVID-19 has created near-term cyclical headwinds for the UK real estate
sector, whilst providing the catalyst for acceleration in structural trends
that were already underway pre-pandemic. The requirement for more flexible
workplace arrangements is evident in the office sector and a number of
companies are reassessing their requirements in light of more flexible working
arrangements and lower expected growth. Take-up decreased across major office
markets and availability rates rose sharply. Demand for the best quality space
has proven to be more resilient and this is likely to be the case going forward
for the sector. The clear beneficiary in the acceleration of structural changes
was the industrial and logistics sector. The logistics sector recorded its
strongest year of take-up on record in 2020 as the closure of non-essential
retail units, for a large part of the year, facilitated a greater transition to
online retailing. Despite the obvious challenges, the COVID-19 impact on UK
retail has not been homogenous across all retail sub-sectors as illustrated by
the resilience of supermarket trading. In fact, the supermarket sector
benefitted from unprecedented Christmas demand in 2020, with take home grocery
sales rising 11.4% year-on-year over the 12 weeks to 27 December 2020 according
to Kantar data.
OFFICE
The office sector delivered a total return of -1.7% in 2020 according to the
MSCI Quarterly Index. However, the headline number masks significant variation
in returns both geographically and even within cities. Within Central London
there was a clear divergence in performance, where City offices recorded a
total return of 1.1% with values declining by -2.2% in 2020. Conversely West
End offices recorded a total return of -5.8% in 2020, with values down -8.8%
over the year. Regional offices experienced capital value declines of -4.2%,
resulting in a marginally positive total return of 0.3% over the year. The
performance of offices is perhaps unsurprising given that the pandemic has
resulted in a noticeable deterioration in the occupational market. Aside from
the short-term cyclical disruption COVID-19 has undoubtedly created, it has
also accelerated longer term structural challenges for the sector. The
increased prominence of working from home for the majority of office based
staff has resulted in some occupiers putting requirements for future space on
hold while they evaluate how to deal with more agile working arrangements. The
result is that take-up was down over 50% in 2020 and by the end of December
both vacancy and availability rates in Central London had increased to 8.1% and
10% respectively. However, it is important to highlight a clear distinction by
building quality. The availability of Grade A office space remains well
balanced in the capital, as it does in key regional markets, especially for
larger floorplates. But there has been a sharp increase in sub-let or so called
grey space coming to the market, accounting for 75% of the total in London.
Similar trends were witnessed in the regional office markets, with the take up
dropping by 33% on the ten-year average within the largest nine regional office
markets. There remains scant evidence of the weak occupational market putting
material downward pressure on headline rents at this point, but the momentum by
the end of 2020 was negative as rents declined by -0.8% over the course of the
year. We therefore expect to see further rental declines in
2021 as more evidence becomes apparent. The office sector will remain an area
of significant change, with a greater divergence in returns expected between
offices that meet occupier needs, and those that do not.
RETAIL
According to the MSCI Quarterly Index, the retail sector delivered a total
return of -12.3% in 2020, with values falling by 16.9%. That overall
performance masks significant dispersion within the sector, however. Shopping
centre values collapsed by just under 30% over the last 12 months, dwarfing the
17% fall in values seen in 2019. Average shopping centre values now sit 66%
below their 2007 peak level and, with virtually no investment market liquidity,
pricing suggests further falls in 2021. In complete contrast, supermarket
values rose by 1.4% in 2020, with their status as essential infrastructure and
their long, secure income profiles proving highly attractive to investors.
Retail warehouses, which represent a broad church of assets, sit right
in-between, with values down 15.7% on average over the last 12 months. Solus
(standalone) units, many let to DIY or discount operators on long leases, lost
only 8.7% of value on average.
By the end of the year, solus units had stabilised and began to see modest
capital growth. However, the largest parks, often with more exposure to the
fashion sector, saw values fall by nearly 21% in 2020. Meanwhile, high streets
have also suffered from a collapse in footfall and the enforced closure of
fashion occupiers. For the first time, Central London has not been immune, with
values down 16.9%, compared with a 20% decline for all shops nationally.
Indeed, London suffered the most of any region in the final quarter. The impact
of COVID-19 on international travel and office-related footfall going forward
is a major threat to retail and hospitality businesses in London, where rents
and business rates have soared over the last 10 years. While the government has
provided significant support and protection for retailers since the pandemic
began, with the recent budget extending some of these measures such as business
rates holidays and a new restart grant, the eventual ending of these measures
could herald further business failures and rising vacancy rates. The
polarisation between positive performance from assets in essential retail use,
relying on predictable, local catchment spending, and discretionary retail that
is hamstrung by travel limitations and trading restrictions may continue for
much of 2021. In the longer term, the acceleration of sales transitioning
online during the pandemic and greater prevalence of turnover-based rental
payments is expected to mean a further rebasing of rents across discretionary
retail locations. In contrast, however, the step change in online grocery spend
likely underpins the importance and performance prospects of the dominant,
well-configured supermarkets that are crucial for fulfilment and last-mile
distribution.
INDUSTRIAL
Industrials maintained their position as the best performing UK commercial real
estate sector for the fourth consecutive year. The sector delivered a total
return of 9.2% in 2020, with values rising by 4.6% according to the MSCI
Quarterly Index. Sentiment towards the sector remains very positive given the
favourable structural drivers of the occupier market, especially for space
constrained logistics in urban areas. This is particularly the case in the
South East where the segment recorded a total return of 10.1% driven by capital
growth of 5.9%. Performance for London industrials was the strongest,
delivering a total return of 7.9% in Q4 and 12.3% for the calendar year.
Despite a year categorised by multiple lockdowns, impeding travel and
inspections, investment levels reached £10.1bn in 2020, the highest level
recorded since 2017. As a result, the industrial sector accounted for 22% of
all UK investment transactions during the year, the highest market share on
record. The pandemic clearly resulted in an acceleration in the transition to
online retailing which was reflected in the occupational market. The UK
logistics sector experienced a record year of take-up in 2020 with 50.1 million
sq. ft. of new leases agreed on warehouse space, 12.7 million sq. ft. ahead of
the previous record set in 2016 according to Savills. Leases agreed with Amazon
accounted for a quarter of all take-up, but the sector would still have broken
new records even if Amazon and short-term deals were removed. Aided by a record
year of take-up, the vacancy rate for the logistics sector now stands at 5.7%
at the national level and an even lower 3.5% in London and the South East.
Market fundamentals remain supportive for continued rental growth driven by a
structurally supportive demand outlook.
ALTERNATIVES
The UK real estate alternative sector, or "Other Property" as it is categorised
by MSCI, represents real estate which falls outside the traditional 'Retail',
'Office' or 'Industrial' definitions. This sector recorded a total return of
-5.3% in 2020. This is predominantly due to the large weighting of leisure and
hotels within the sample. Returns for these segments during the year were
-14.6% and -2.6% respectively. Both of these consumer facing segments have
borne the brunt of the challenges created as a result of the pandemic, with the
path to recovery expected to be gradual and not without its challenges,
especially for the hospitality sector. Outwith these two sectors, the Purpose
Built Student Accommodation (PBSA) sector continued to attract investor
interest, despite lockdowns inhibiting the return of students to university. In
the face of a challenging occupational backdrop, the sector still managed to
deliver a total return of 4.9% in the year to September 2020 according to CBRE.
As was the case with the majority of sectors, the returns within the sector
were highly polarised. Prime assets which are aligned to top tier universities
significantly outperformed secondary assets. Early indications from UCAS
illustrate that applications for the 2021/22 academic year look positive, and
provided a vaccine can be rolled out by September 2021, the sector should see
this converted to PBSA bookings.
Investor interest in the build to rent (BtR) sector continued unabated in 2020,
recording its highest annual investment total on record at £3.5 billion, with a
number of new entrants to the market announced during 2020. Although these
sectors remain nascent compared to more developed international markets, there
remains significant interest given their more resilient performance during the
pandemic.
MARKET OUTLOOK
2021 is expected to be a year of two halves. The national lockdown and
restrictions on travel along with the impact of the final Brexit deal will have
a negative impact on the economy and real estate market in the first half of
the year. However the second half is expected to be significantly different as
the economy reopens with strong growth albeit from a low base. The economic
shocks from COVID-19, as well as the after effects of Brexit are going to
create a challenging macroeconomic environment and after the strong bounce back
we are likely to be in a new period of low growth and low interest rates.
The low interest rate environment is likely to support continued demand for
real estate as an income producing real asset. The weight of money available to
invest in real estate is going to be supportive of values, however we expect a
strong differential in performance both across sectors, and within sectors.
The theme of Industrial performing well and Retail poorly is expected to
continue, but become more nuanced. Shopping centres and fashion-led retail is
likely to continue to see falling capital and rental values, whilst food and
budget retail should hold up well. Logistics remains a strong sub sector with
continued demand pushing rents and values up, but we suggest greater caution is
required around smaller multi let units generally rented to poorer covenants
more likely to struggle in a weaker economic environment. The office market is
in a period of change and is likely to see rental value falls and reduced
demand: however, it is a sector that is likely also to see the best properties
do better and the weaker ones worse as users and buyers become more selective.
Income will be the main driver of returns over the next few years. Long let
secure income is trading at ever lower yields, and those seeking a greater
yield are going to have to take an active approach of investing in assets with
shorter leases but more sustainable income through diversification and good
quality assets that meet occupier needs.
PERFORMANCE
There are a number of measures we use to assess performance. These are detailed
below, and range from the performance of the investments to what shareholders
have experienced.
Portfolio return:
A comparison of the investment portfolio return against the MSCI benchmark is
the best measure of how the underlying portfolio is performing. 2020 was a
difficult year for the Company, with all assets written down in value in the
first half of the year, reflecting the sentiment surrounding the national
lockdown.
As the year progressed this was in part unwound, particularly in the industrial
/ logistics space. One of the characteristics of the market in 2020 was a wider
than normal dispersion of returns both between sectors, but also within
sectors. The Company's portfolio total return slightly underperformed the MSCI
benchmark in 2020 but still compares favourably to the index over 3, 5, and 10
years. The chart below shows these returns.
NAV return:
The NAV total return is probably the best measure of the sum of the investment
manager's effort. As can be expected at a time of negative capital value
movement the NAV is impacted by the debt utilized to invest in additional
properties. Also during 2020 the liability held in the accounts for the
interest swap increased to £3.74m, which also had a negative impact on the NAV
- this will revert to £0 on maturity (April 2023) and so the NAV will benefit
in the future. The Company's NAV total return v that of the AIC Property Direct
UK sector, and also the IA open ended funds sector are shown in the table
below.
Share Price total return:
This measure is least reflective of the investment managers' input, but is of
course most reflective of the experience of the shareholder. The share price
moved quite dramatically over 2020 - trading at a premium to NAV at the
beginning of the year but moving to a significant discount as the pandemic
developed. Towards the end of 2020 the Company started to buy back its own
shares as an investment as the shares were perceived as good value relative to
other investment opportunities available to the Investment Manager.
NAV Total Returns to 31 December 2020 1 year (%) 3 years (%) 5 years (%) 10 years (%)
Standard Life Investments Property Income Trust (4.6) 8.8 30.0 140.2
AIC Property Direct - UK sector (weighted average) 1.2 15.6 24.9 32.4
Investment Association Open Ended Commercial Property (3.6) 0.4 8.6 47.2
Funds sector
Source: AIC, Aberdeen Standard Investments
Share Price Total Returns to 31 December 2020 1 year (%) 3 years (%) 5 years (%) 10 years (%)
Standard Life Investments Property Income Trust (29.8) (24.0) (7.6) 70.3
FTSE All-Share Index (9.8) (2.7) 28.5 71.9
FTSE All-Share REIT Index (16.2) (4.1) 0.2 95.2
AIC Property Direct - UK sector (weighted average) (2.0) 11.6 20.2 10.8
Source: AIC, Aberdeen Standard Investments
VALUATION
The investment portfolio is valued on a quarterly basis by Knight Frank LLP. At
the risk of repetition, 2020 was a challenging year for valuers. The RICS
(governing body for valuers) required valuations in March to have a material
uncertainty clause for all valuations, stating that a lower level of confidence
in the reliability of the valuation figure could be expected. By year end the
material uncertainty clause had been lifted, and greater transaction levels
provided more evidence to support valuations.
At the 2020 year end the portfolio was valued at £437.7m (£493.2m December
2019) and cash of £9.4m was held (£6.5 December 2019). The portfolio comprised
of 50 assets as at 30 December (56 assets as at December 2019). Drawn debt at
year end was £110m with none of the £55m revolving credit facility drawn (£18m
drawn December 2019).
INVESTMENT STRATEGY
The Company has a clear investment objective that drives the activities of the
Board and Investment Manager. The investment objective is "to provide investors
with an attractive income return, with the prospects of income and capital
growth, through investing in a diversified portfolio of commercial real estate
assets in the UK." The Board and investment Manager believe that the dividend
should be covered by income over the medium term.
That objective has been challenged in 2020 with many tenants unable to pay
rent, or paying reduced amounts during lockdown. Although 93% of rent due was
collected through 2020 it was necessary to reduce the dividend to protect the
balance sheet during such uncertain times. The reduction in dividend was made
for the 2nd, 3rd and 4th quarters of the year, where 60% of the previous
dividend level was paid. In total this resulted in the dividends paid in 2020
being 80% of the 2019 level. A balancing top up payment has also been declared
in April of 0.381p.
As the immediate impact of COVID-19 lockdowns eases and the economy reopens, so
one expects to see a recovery in the rents received by the Company and,
potentially enabling an increase in the dividend again. COVID-19 has, however,
accelerated trends already seen in the market and the Board and Investment
Manager believe that some changes in emphasis in the investment strategy are
required.
Income remains a key focus, but it should not be at the expense of total
return, and it is important that we invest in assets that can produce a
reliable future income. ESG is an important consideration and we believe that
only assets that meet high ESG standards will appeal to tenants and provide a
strong resilient income flow. As such we expect future investments to have a
strong ESG focus and that will have an impact in the yield we obtain. This is a
nuanced change of focus, with ESG driving our strategy more, and means the
portfolio yield is likely to trend to the low 5%s from the existing 5.8%.
Although these assets might have lower yields, they are likely to have stronger
net operating income growth to support future dividend growth.
Later in the report we detail the Company's ESG activities: however it is worth
pointing out under the investment strategy that ESG is at the heart of
everything we do. We believe that having a portfolio which is fit for the
future, will meet occupiers' needs and provide the strongest returns, requires
a progressive approach to ESG. As such, ESG is a key component of decision
making for the Company.
PURCHASES
One purchase was made during 2020 of a retail warehouse unit let to B&Q for a
further 11 years. The unit is in Halesowen and is a strong performer for B&Q.
The purchase price of £19.5 million reflected an income yield of 7.5%. Although
retail was considered very unfashionable in 2020 we believe units like this,
with strong alternative use potential in the future as well as a long secure
income stream from the existing tenant provide attractive return prospects.
The Company ended 2020 with circa £55 million available to invest. The
Investment Manager is assessing a number of opportunities, with an expectation
of investing available resources during 2021.
SALES
Three sales were completed in 2020 totalling £51 million. In January the
Company sold a single let office building in Staines for £10.7 million, and
then in December sold a standalone retail warehouse for £3.3 million and a
portfolio of four multi let industrial estates for £37.75 million.
After the reporting period the Company completed the sale of an office in Derby
for £4.3 million.
The sales were undertaken following an extensive review of the portfolio which
took into account concerns over the aftermath of COVID-19 and Brexit where we
identified several assets that we no longer had confidence would deliver the
return characteristics we look for.
ASSET MANAGEMENT
The Investment Manager has an experienced asset management team dedicated to
the Company, who take an active approach to managing the assets to add value
through restructuring and extending leases, refurbishment and upgrading of
assets, and leasing of vacant accommodation. Over the last 12 months the main
focus of asset management has been on working with tenants to understand their
needs and help them through the various trading restrictions individual
companies have experienced.
The level of tenant interaction has been very pleasing, and in many cases we
have been able to work with the tenant to agree a suitable solution to the
issues COVID-19 created. We worked closely with our managing agents to ensure
that buildings were managed in such a way as to protect staff and users of the
buildings, to minimise operating costs, but also to properly maintain services
and equipment. Indeed, we have been able to bring forward some planned works so
that they can be undertaken when the buildings are at very low occupancy
levels.
Rent collection has been very much in the spotlight. We have taken an approach
of dealing with each tenant individually based on their needs. We only have a
small number of sole trader retail units (e.g. tanning studios / hairdressers
etc.) because of our low retail exposure, but in those cases we have written
off rent during lockdowns as the tenant has no ability to generate income, or
indeed recoup lost earnings once they reopen. For other tenants we have, where
required, provided rent free periods in return for a lease restructuring to
extend the lease commitment, or agreed deferments for payment.
Sadly, the Government's restriction on enforcing lease contacts has meant some
tenants have chosen not to pay rent and not to engage with us, despite having
the ability to pay. While we have a prudent provision for bad debts in the
financial statements, we anticipate recovery of some of the outstanding rents
once we are able to enforce lease obligations again.
Collection By Sector 2020
Gross Demand % Received
Retail £3,412,470 82%
Industrial £15,953,490 100%
Office £10,926,581 91%
Other £2,415,252 78%
Total £32,707,793 93.6%
During the reporting period five rent reviews were settled with uplifts in
rent, securing an additional £58,256 pa (an average increase of 19% on previous
rent). A total of 15 lease renewals and restructurings were undertaken,
securing £2,587,491 pa in rent, and a total of eight lettings securing £890,369
pa.
DEBT
The Company utilises debt, with two forms of borrowings, both from the Royal
Bank of Scotland. The main facility is a fully drawn term loan of £110m which
matures in April 2023. The Company entered into an interest rate swap when the
term loan was taken out, and that is marked to market each quarter in the NAV.
At the end of the year it stood as a liability of £3.75m (£2.2m 2019). This
will revert to zero on maturity in April 2023 giving a boost to the NAV.
The Company also has a £55m revolving credit facility. Following asset sales at
the end of the year this was fully repaid, and provides firepower for future
purchases.
The Loan to Value (LTV) at year end was 23.0%, (Dec 2019 24.6%), with an all in
cost of 2.7%. The Company is comfortable with an LTV in the range of 20-35%.
With the debt facility due to mature in April 2023 the Company will formulate a
strategy to replace the existing facility in ahead of maturity.
ESG
In many ways it feels wrong to have a separate part of the report on ESG, as it
is an integral part of how we manage the Company. ESG now features in every
decision we make and by considering ESG risks and opportunities we help protect
and enhance performance over the long term. We aim to position SLIPIT at the
forefront of ESG as we believe that buildings with strong ESG credentials will
have the greatest appeal to occupiers.
Our approach has matured significantly in recent years and will continue to
develop as we learn more about the ESG trends affecting the built environment
and the objectives of our stakeholders. It's a process that continually evolves
but what doesn't change is our commitment to deliver value through improving
the quality of the built environment and to create better places for our
occupiers and local communities.
We have started to take real practical steps on several of the most material
issues for the Company. The portfolio managers have piloted Aberdeen Standard
Investment's proprietary ESG Impact Dial tool which we are using to baseline
the ESG performance of all Company assets and set objectives across a full
range of ESG topics.
Here, we summarise current activities and objectives related to our current
focus areas and in particular, describe our activities on energy and carbon
emissions.
CARBON REDUCTION AND ENERGY EFFICIENCY
The Company has an active approach to managing energy efficiency and carbon
emissions across the portfolio where there is landlord-procured energy. Since 1
April 2018 the Company has only procured Green certified electricity for all
its supplies. The realities of transforming the Company to net-zero carbon mean
we are starting to look far more holistically at emissions from the portfolio's
properties; including tenant emissions and embodied carbon from developments.
Following the Investment Manager's net zero commitment in 2019, the Company has
committed to being a pioneer portfolio and will undertake work to develop its
own net-zero pathway this year. Our view is that by fully understanding the
implications of decarbonisation now and positioning the portfolio favourably
will help mitigate potential future value impairment due to regulatory changes
and changing occupier demands.
The kick-off phase in 2021 will involve the benchmarking of existing assets and
the definition of best-value strategies to achieve net zero. We have already
started assessing and implementing such as energy efficiency upgrades, the
electrification of heating and renewable energy installations. Around 85% of
the Company's current carbon footprint is due to occupier energy consumption.
One of the biggest challenges we have experienced to date has been gaining
detailed data and understanding of tenant consumption. Knowledge is key to
improving the performance of the company, and we are trying to work with our
tenants firstly to understand and then to improve energy consumption.
Even with an extensive programme of measures there are likely to be residual
carbon emissions from the portfolio in the future. We have already begun
exploring options to compensate for these emissions ourselves through direct
investment in afforestation which can help avoid potential future offset costs.
The timeline overleaf summarises the high-level components of this strategy.
This will be refined further this year following detailed pathway work.
In 2020 we completed our largest solar PV scheme to date; a 918 kWp scheme in
Sandy to supply electricity to our occupier Flamingo Flowers, more details of
which is given in the infographic overleaf. The Company now has six operational
PV schemes totalling 1.2MWp and has another 20 schemes in various stages of
implementation. All the schemes involve selling generated power to the tenant,
which provides the Company with an attractive return, reduces the carbon load
on the Company, but also reduces cost for the tenant and supports their ESG
credentials.
It is very easy to just concentrate on the "E" of ESG, but the "S" is important
in how we manage buildings. Social aspects are much harder to measure, but
relate to how we create an environment where people want to work - it helps
improve morale and productivity for our tenants and therefore improves demand /
retention at our buildings. Fifteen months ago we would have talked about the
functions we arrange on site in some of our multi let offices, such as access
to Yoga classes, great shower and changing facilities, pop up stands supporting
local charities and food bank collections. COVID has put those on hold, but it
doesn't mean we have stopped. Small things like arranging for the office
Christmas tree to go to a hospital children's ward, or donating the tea and
coffee supplies from the office break out to an ICU ward for hospital workers
have continued to engage with occupiers, and create a sense of community around
our buildings.
OUTLOOK AND FUTURE STRATEGY
The one certainty we have today is that change will continue. Many of the
themes we have seen from COVID-19 will also continue; with elevated on-line
retail, a mix of home working, and a challenging economic environment.
The increased focus on ESG is also likely to continue and that is an area the
Company is looking to be a leader. The way that the Company can deliver its
corporate objective of an attractive level of income, with prospects of income
and capital growth, is to ensure it has a portfolio that is of sufficient ESG
standards to appeal to occupiers and thus benefit from increases in net
operating income and occupancy. A slightly lower yield today might be required
to ensure strong total returns in the future. The Company is developing its
pathway to carbon neutrality and hopes to invest in land for reforestation in
order to achieve this at a known cost, rather than be exposed to future,
potentially expensive, carbon offset pricing.
We will retain our active approach to managing the Company, ensuring that our
assets are affordable and appeal to occupiers. We will structure the Company to
be "future fit" and ready to meet the challenges of change.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the Group
Consolidated Financial Statements for each year which give a true and fair
view, in accordance with the applicable Guernsey law and those International
Financial Reporting Standards ("IFRSs") as adopted by the European Union.
In preparing those Consolidated Financial Statements, the Directors are
required to:
. select suitable accounting policies in accordance with IAS 8: Accounting
Policies, Changes in Accounting Estimates and Errors and then apply them
consistently;
. make judgement and estimates that are reasonable and prudent;
. present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information;
. provide additional disclosures when compliance with the specific
requirements in IFRSs as adopted by the European Union is insufficient to
enable users to understand the impact of particular transactions, other events
and conditions on the Group's financial position and financial performance;
. state that the Group has complied with IFRSs as adopted by the European
Union, subject to any material departures disclosed and explained in the Group
Consolidated Financial Statements; and
. prepare the Group Consolidated Financial Statements on a going concern
basis unless it is inappropriate to presume that the Group will continue in
business.
The Directors confirm that they have complied with the above requirements in
preparing the Consolidated Financial Statements.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Group's transactions and disclose with
reasonable accuracy at any time, the financial position of the Group and to
enable them to ensure that the Financial Statements comply with The Companies
(Guernsey) Law, 2008. They are also responsible for safeguarding the assets of
the Group and hence for taking reasonable steps for the prevention and
detection of fraud, error and non compliance with law and regulations.
The maintenance and integrity of the Company's website is the responsibility of
the Directors through its Investment Manager; the work carried out by the
auditors does not involve considerations of these matters and, accordingly, the
auditors accept no responsibility for any change that may have occurred to the
Consolidated Financial Statements since they were initially presented on the
website. Legislation in Guernsey governing the preparation and dissemination of
the consolidated financial statements may differ from legislation in other
jurisdictions.
Responsibility Statement of the Directors in respect of the Consolidated Annual
Report under the Disclosure and Transparency Rules.
The Directors each confirm to the best of their knowledge that:
. the Consolidated Financial Statements, prepared in accordance with IFRSs
as adopted by the European Union, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Group; and
. the management report, which is incorporated into the Strategic Report,
Directors' Report and Investment Manager's Report, includes a fair review of
the development and performance of the business and the position of the Group,
together with a description of the principal risks and uncertainties that they
face.
Statement under the UK Corporate Governance Code.
The Directors each confirm to the best of their knowledge and belief that the
Annual Report and Consolidated Financial Statements taken as a whole are fair,
balanced and understandable and provide the information necessary to assess the
Group's position and performance, business model and strategy.
Approved by the Board on
29 April 2021
James Clifton-Brown Chairman
FINANCIAL STATEMENTS
Consolidated Statement of Comprehensive Income for the year ended 31 Notes 31-Dec-20 31-Dec-19
December 2020 £ £
Rental income 29,439,549 29,878,646
Service charge income 3,543,976 3,313,463
Surrender premium 21,250 580,000
Valuation loss from investment properties 7 (27,640,224) (3,613,836)
(Loss)/gain on disposal of investment properties 7 (4,806,137) 427,304
Investment management fees 4 (3,198,519) (3,492,880)
Valuer's fees 4 (84,638) (97,668)
Auditor's fees 4 (118,400) (81,850)
Directors' fees and subsistence 22 (236,953) (227,276)
Service charge expenditure (3,543,976) (3,313,463)
Other direct property expenses (4,904,968) (2,935,023)
Other administration expenses (512,849) (530,862)
Operating (loss)/profit (12,041,889) 19,906,555
Finance income 5 3,896 15,856
Finance costs 5 (3,744,074) (3,778,280)
Loss/(pro fit) for the period before taxation (15,782,067) 16,144,131
Taxation
Tax charge - -
(Loss)/Pr ofit for the period, net of tax (15,782,067) 16,144,131
Other Comprehensive Income
Valuation loss on cash flow hedge 14 (1,514,638) (1,416,653)
Total other comprehensive loss (1,514,638) (1,416,653)
Total comprehensive (loss)/gain for the period, net of tax (17,296,705) 14,727,478
Earnings per share 2020 (p) 2019 (p)
Basic and diluted earnings per share 18 (3.88) 3.98
EPRA earnings per share 18 4.10 4.76
Consolidated Balance Sheet as at 31 December 2020
31 December 31 December
ASSETS Notes 2020 £ 2019 £
Non-current assets
Investment properties 7 428,412,375 477,855,299
Lease incentives 7 5,885,270 5,523,822
Rental deposits held on behalf of tenants 855,866 1,298,364
435,153,511 484,677,485
Current assets
Investment properties held for sale 8 4,300,000 10,700,000
Trade and other receivables 10 10,802,197 3,913,519
Cash and Cash equivalents 11 9,383,371 6,475,619
24,485,568 21,089,138
Total Assets 459,639,079 505,766,623
LIABILITIES
Current liabilities
Trade and other payables 12 13,096,054 9,232,072
Interest rate swap 14 1,472,387 644,465
14,568,441 9,876,537
Non-current liabilities
Bank borrowings 13 109,542,823 127,316,886
Interest rate swap 14 2,262,867 1,576,151
Obligations under finance leases 15 902,645 904,121
Rent deposits due to tenants 855,866 1,298,364
113,564,201 131,095,522
Total liabilities 128,132,642 140,972,059
Net assets 331,506,437 364,794,564
EQUITY 2020 £ 2019 £
Capital and reserves attributable to Company's equity holders
Share capital 17 228,383,857 227,431,057
Treasury share reserve 17 (1,450,787) -
Retained earnings 18 7,339,209 6,168,350
Capital reserves 18 (604,214) 33,356,785
Other distributable reserves 18 97,838,372 97,838,372
Total equity 331,506,437 364,794,564
Consolidated Statement of Changes Notes Share Treasury Retained Capital Other Total equity
in Equity for the year ended 31 Capital £ shares £ Earnings £ Reserves £ Distributable £
December 2020 Reserves £
Opening balance 1 January 2020 227,431,057 - 6,168,350 33,356,785 97,838,372 364,794,564
Loss for the year - - (15,782,067) - - (15,782,067)
Other comprehensive income - - - (1,514,638) - (1,514,638)
Total comprehensive loss for the - - (15,782,067) (1,514,638) - (17,296,705)
period
Ordinary shares issued net of 17 952,800 - - - - 952,800
issue costs
Ordinary shares placed into 17 - (1,450,787) - - - (1,450,787)
treasury net of issue costs
Dividends paid 20 - - (15,493,435) - - (15,493,435)
Valuation loss from investment 7 - - 27,640,224 (27,640,224) - -
properties
Loss on disposal of investment 7 - - 4,806,137 (4,806,137) - -
properties
Balance at 31 December 2020 228,383,857 (1,450,787) 7,339,209 (604,214) 97,838,372 331,506,437
Consolidated Statement of Changes in Equity
for the year ended 31 December 2019
Other
Share Capital Retained Capital Distributable
earnings reserves Reserves Total equity
Notes £ £ £ £ £
Opening balance 1 January 2019 227,431,057 6,156,881 37,959,970 97,838,372 369,386,280
Profit for the year - 16,144,131 - - 16,144,131
Other comprehensive income - - (1,416,653) - (1,416,653)
Total comprehensive income for the period - 16,144,131 (1,416,653) - 14,727,478
Ordinary shares issued net of issue costs 17 - - - - -
Dividends paid 20 - (19,319,194) - - (19,319,194)
Valuation loss from investment properties 7 - 3,613,836 (3,613,836) - -
Gain on disposal of investment properties 7 - (427,304) 427,304 - -
Balance at 31 December 2019 227,431,057 6,168,350 33,356,785 97,838,372 364,794,564
Consolidated Cash Flow Statement for the year ended 31 December 2020
Cash flows from operating activities Notes 31-Dec-20 31-Dec-19
£ £
Profit for the year before taxation (15,782,067) 16,144,131
Movement in lease incentives (1,694,642) (1,881,958)
Movement in trade and other receivables (6,446,180) (400,215)
Movement in trade and other payables 3,421,484 (2,216,558)
Finance costs 5 3,744,074 3,778,280
Finance income 5 (3,896) (15,856)
Valuation loss from investment properties 7 27,640,224 3,613,836
Loss/(gain) on disposal of investment properties 7 4,806,137 (427,304)
Net cash inflow from operating activities 15,685,134 18,594,356
Cash flows from investing activities
Interest received 5 3,896 15,856
Purchase of investment properties 7 (21,297,754) (25,808,526)
Capital expenditure on investment properties 7 (4,947,828) (4,628,353)
Net proceeds from disposal of investment properties 7 50,973,863 35,067,304
Net cash inflow from investing activities 24,732,177 4,646,281
Cash flows from financing activities
Proceeds on issue of ordinary shares 17 952,800 -
Shares bought back during the year 17 (1,450,787) -
Bank borrowing 13 27,000,000 1,000,000
Repayment of RCF 13 (45,000,000) (3,000,000)
Bank borrowing arrangement costs 13 - (150,000)
Interest paid on bank borrowing 5 (2,479,388) (2,986,775)
Payments on interest rate swaps 5 (1,038,749) (574,021)
Dividends paid to the Company's shareholders 20 (15,493,435) (19,319,194)
Net cash outflow from financing activities (37,509,559) (25,029,990)
Net increase/(decrease) in cash and cash equivalents 2,907,752 (1,789,353)
Cash and cash equivalents at beginning of year 11 6,475,619 8,264,972
Cash and cash equivalents at end of year 11 9,383,371 6,475,619
Notes to the Consolidated Financial Statements for the year ended 31 December
2020
1 GENERAL INFORMATION
Standard Life Investment Property Income Trust Limited ("the Company") and its
subsidiaries (together "the Group") carries on the business of property
investment through a portfolio of freehold and leasehold investment properties
located in the United Kingdom. The Company is a limited liability company
incorporated in Guernsey, Channel Islands. The Company has its listing on the
London Stock Exchange.
The address of the registered office is PO Box 255, Trafalgar Court, Les
Banques, St Peter Port, Guernsey.
These audited Consolidated Financial Statements were approved for issue by the
Board of Directors on 29 April 2021.
2 ACCOUNTING POLICIES
2.1 Basis of preparation
The audited Consolidated Financial Statements of the Group have been prepared
in accordance with International Financial Reporting Standards as adopted by
the European Union ("IFRS"), and all applicable requirements of The Companies
(Guernsey) Law, 2008. The audited Consolidated Financial Statements of the
Group have been prepared under the historical cost convention as modified by
the measurement of investment property and derivative financial instruments at
fair value. The Consolidated Financial Statements are presented in pounds
sterling and all values are not rounded except when otherwise indicated.
The Directors have considered the basis of preparation of the accounts given
the COVID-19 pandemic and believe that it is still appropriate for the accounts
to be prepared on the going concern basis.
Changes in accounting policy and disclosure
A number of new standards and amendments to standards and interpretations are
effective for annual periods beginning on or after 1 January 2020, and have not
been applied in preparing these consolidated financial statements.
None of these are expected to have a significant effect on the consolidated
financial statements of the Group, except the following set out below:
. Amendments to IFRS 3, Business Combinations - The IASB published an
amendment to the requirements of IFRS 3 in relation to whether a transaction
meets the definition of a business combination. The amendment clarifies the
definition of a business, as well as provides additional illustrative examples,
including those relevant to the real estate industry. A significant change in
the amendment is the option for an entity to assess whether substantially all
of the fair value of the gross assets acquired is concentrated in a single
asset or group of similar assets. If such a concentration exists, the
transaction is not viewed as an acquisition of a business and no further
assessment of the business combination guidance is required. This will be
relevant where the value of the acquired entity is concentrated in one
property, or a group of similar properties. The amendment is effective for
periods beginning on or after 1 January 2020 with earlier application
permitted. There will be no impact on transition since the amendments are
effective for business combinations for which the acquisition date is on or
after the transition date.
Annual Improvements to IFRS
The Group has made no adjustments to its financial statements in relation to
IFRS Standards detailed in the annual Improvements to IFRS 2018-2020 Cycle
(effective for annual reporting periods beginning on or after 1 January 2022).
The Group will consider these amendments in due course to see if they will have
any impact on the Group.
2.2 Significant accounting judgements, estimates and assumptions
The preparation of the Group's Financial Statements requires management to make
judgements, estimates and assumptions that affect the reported amounts of
revenues, expenses, assets and liabilities, and the disclosure of contingent
liabilities, at the reporting date. However, uncertainties about these
assumptions and estimates could result in outcomes that could require a
material adjustment to the carrying amount of the asset or liability affected
in the future periods. The most significant estimates and judgements are set
out below. There were no critical accounting judgements.
Fair value of investment properties
Investment properties are stated at fair value as at the Balance Sheet date.
Gains or losses arising from changes in fair values are included in the
Consolidated Statement of Comprehensive Income in the year in which they arise.
The fair value of investment properties is determined by external real estate
valuation experts using recognised valuation techniques. The fair values are
determined having regard to any recent real estate transactions where
available, with similar characteristics and locations to those of the Group's
assets.
In most cases however, the determination of the fair value of investment
properties requires the use of valuation models which use a number of
judgements and assumptions. The only model used was the income capitalisation
method. Under the income capitalisation method, a property's fair value is
judged based on the normalised net operating income generated by the property,
which is divided by the capitalisation rate (discounted by the investor's rate
of return). Under the income capitalisation method, over (above market rent)
and under-rent situations are separately capitalised (discounted).
The sensitivity analysis in note 7 details the decrease in the valuation of
investment properties if equivalent yield increases by 50 basis points or
rental rates (ERV) decreases by 5% which the Board believes are reasonable
sensitivities to apply given historical movements in valuations.
Fair value of financial instruments
When the fair value of financial assets and financial liabilities recorded in
the Consolidated Balance Sheet cannot be derived from active markets, they are
determined using a variety of valuation techniques that include the use of
mathematical models. The input to these models are taken from observable
markets where possible, but where this is not feasible, a degree of judgement
is required in establishing fair value. The judgements include considerations
of liquidity and model inputs such as credit risk (both own and
counterparty's), correlation and volatility.
Changes in assumptions about these factors could affect the reported fair value
of financial instruments. The models are calibrated regularly and tested for
validity using prices from any observable current market transactions in the
same instrument (without modification or repackaging) or based on any available
observable market data.
The valuation of interest rate swaps used in the Balance Sheet is provided by
The Royal Bank of Scotland. These values are validated by comparison to
internally generated valuations prepared using the fair value principles
outlined above.
The sensitivity analysis in note 3 details the increase and decrease in the
valuation of interest rate swaps if market rate interest rates had been 100
basis points higher and 100 basis points lower.
Provision for Bad debts
Provision for bad debts are also a key estimation uncertainty. These are
measured with reference to amounts included as income at the year end but not
yet collected. In assessing whether the credit risk of an asset has
significantly increased the Group takes into account qualitative and
quantitative reasonable and supportable forward-looking information.
Due to the impact of COVID-19 on collection rates, there has been a significant
increase in our assessed credit risk. Each individual rental income debtor is
reviewed to assess whether it is believed there is a probability of default and
expected credit loss given the knowledge and intelligence of the individual
tenant and an appropriate provision made.
2.3 Summary of significant accounting policies A Basis of consolidation
The audited Consolidated Financial Statements comprise the financial statements
of Standard Life Investments Property Income Trust Limited and its material
wholly owned subsidiary undertakings.
Control is achieved when the Group is exposed, or has rights, to variable
returns from its involvement with subsidiaries and has the ability to affect
those returns through its power over the subsidiary.
Specifically, the Group controls a subsidiary if, and only if, it has:
. Power over the subsidiary (i.e. existing rights that give it the current
ability to direct the relevant activities of the subsidiary)
. Exposure, or rights, to variable returns from its involvement with the
subsidiary
. The ability to use its power over the subsidiary to affect its returns
The Group assesses whether or not it controls a subsidiary if facts and
circumstances indicate that there are changes to one or more of the three
elements of control. Consolidation of a subsidiary begins when the Group
obtains control over the subsidiary and ceases when the Group loses control of
the subsidiary. Assets, liabilities, income and expenses of a subsidiary
acquired or disposed of during the year are included in the consolidated
statement of other comprehensive income from the date the Group gains control
until the date when the Group ceases to control the subsidiary.
The financial statements of the subsidiaries are prepared for the same
reporting period as the parent company, using consistent accounting policies.
All intra-group balances, transactions and unrealised gains and losses
resulting from intra-group transactions are eliminated in full.
B Functional and presentation currency
Items included in the financial statements of each of the Group's entities are
measured using the currency of the primary economic environment in which the
entity operates ("the functional currency"). The Consolidated Financial
Statements are presented in pound sterling, which is also the Company's
functional currency.
C Revenue Recognition
Revenue is recognised as follows:
i) Bank interest
Bank interest income is recognised on an accruals basis.
ii) Rental income
Rental income from operating leases is net of sales taxes and value added tax
("VAT") recognised on a straight line basis over the lease term including lease
agreements with stepped rent increases. The initial direct costs incurred in
negotiating and arranging an operating lease are recognised as an expense over
the lease term on the same basis as the lease income. The cost of any lease
incentives provided are recognised over the lease term, on a straight line
basis as a reduction of rental income. The resulting asset is reflected as a
receivable in the Consolidated Balance Sheet. The valuation of investment
properties is reduced by the total of the unamortised lease incentive balances.
Any remaining lease incentive balances in respect of properties disposed of are
included in the calculation of the profit or loss arising at disposal.
Contingent rents, being those payments that are not fixed at the inception of
the lease, for example increases arising on rent reviews, are recorded as
income in periods when they are earned. Rent reviews which remain outstanding
at the year end are recognised as income, based on estimates, when it is
reasonable to assume that they will be received.
The surrender premiums received for the year ended 2020 were £21,250 (2019: £
580,000) as detailed in the Statement of Comprehensive Income and related to a
tenant break during the year.
iii) Property disposals
Where revenue is obtained by the sale of properties, it is recognised once the
sale transaction has been completed, regardless of when contracts have been
exchanged.
D Expenditure
All expenses are accounted for on an accruals basis. The investment management
and administration fees, finance and all other revenue expenses are charged
through the Consolidated Statement of Comprehensive Income as and when
incurred.
The Group also incurs capital expenditure which can result in movements in the
capital value of the investment properties. The movements in capital
expenditure are reflected in the Statement of Comprehensive Income as a
valuation gain/(loss). In 2020, there were no non-income producing properties
(2019: nil).
E Taxation
Current income tax assets and liabilities are measured at the amount expected
to be recovered from or paid to taxation authorities. The tax rates and tax
laws used to compute the amount are those that are enacted or substantively
enacted by the reporting date. Current income tax relating to items recognised
directly in other comprehensive income or in equity is recognised in other
comprehensive income and in equity respectively, and not in the income
statement. Positions taken in tax returns with respect to situations in which
applicable tax regulations are subject to interpretation, if any, are reviewed
periodically and provisions are established where appropriate.
The Group recognises liabilities for current taxes based on estimates of
whether additional taxes will be due. When the final tax outcome of these
matters is different from the amounts that were initially recorded, such
differences will impact the income and deferred tax provisions in the period in
which the determination is made.
Deferred income tax is provided using the liability method on all temporary
differences at the reporting date between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes.
Deferred income tax assets are recognised only to the extent that it is
probable that taxable profit will be available against which deductible
temporary differences, carried forward tax credits or tax losses can be
utilised. The amount of deferred tax provided is based on the expected manner
of realisation or settlement of the carrying amount of assets and liabilities.
In determining the expected manner of realisation of an asset the Directors
consider that the Group will recover the value of investment property through
sale. Deferred income tax relating to items recognised directly in equity is
recognised in equity and not in profit or loss.
F Investment property
Investment properties comprise completed property and property under
construction or re-development that is held to earn rentals or for capital
appreciation or both. Property held under a lease is classified as investment
property when the definition of an investment property is met.
Investment properties are measured initially at cost including transaction
costs. Transaction costs include transfer taxes, professional fees for legal
services and initial leasing commissions to bring the property to the condition
necessary for it to be capable of operating. The carrying amount also includes
the cost of replacing part of an existing investment property at the time that
cost is incurred if the recognition criteria are met.
Subsequent to initial recognition, investment properties are stated at fair
value. Fair value is based upon the market valuation of the properties as
provided by the external valuers as described in note 2.2. Gains or losses
arising from changes in the fair values are included in the Consolidated
Statement of Comprehensive Income in the year in which they arise. For the
purposes of these financial statements, in order to avoid double counting, the
assessed fair value is:
i) Reduced by the carrying amount of any accrued income resulting from the
spreading of lease incentives and/or minimum lease payments.
ii) Increased by the carrying amount of any liability to the superior
leaseholder or freeholder (for properties held by the Group under operating
leases) that has been recognised in the Balance Sheet as a finance lease
obligation.
Acquisitions of investment properties are considered to have taken place on
exchange of contracts unless there are significant conditions attached. For
conditional exchanges acquisitions are recognised when these conditions are
satisfied. Investment properties are derecognised when they have been disposed
of or permanently withdrawn from use and no future economic benefit is expected
from their disposal. Any gains or losses on the retirement or disposal of
investment properties are recognised in the Consolidated Statement of
Comprehensive Income in the year of retirement or disposal.
Gains or losses on the disposal of investment properties are determined as the
difference between net disposal proceeds and the carrying value of the asset in
the previous full period financial statements.
G Investment properties held for sale
Non-current assets (and disposal groups) classified as held for sale are
measured at the lower of carrying amount and fair value (except for investment
property measured using fair value model).
Non-current assets and disposal groups are classified as held for sale if their
carrying amount will be recovered through a sale transaction rather than
through continuing use. This condition is regarded as met only when the sale is
highly probable and the asset (or disposal group) is available for immediate
sale in its present condition. Management must be committed to the sale which
should be expected to qualify for recognition as a completed sale within one
year from the date of classification.
When the Group is committed to a sale plan involving loss of control of a
subsidiary, all of the assets and liabilities of that subsidiary (i.e. disposal
group) are classified as held for sale when the criteria described above are
met, regardless of whether the Group will retain a non-controlling interest in
its former subsidiary after the sale.
H Trade and other receivables
Trade receivables are recognised and carried at the lower of their original
invoiced value and recoverable amount. Where the time value of money is
material, receivables are carried at amortised cost. A provision for impairment
of trade receivables is established when there is objective evidence that the
Group will not be able to collect all amounts due according to the original
terms of the receivables. Significant financial difficulties of the debtor,
probability that the debtor will enter bankruptcy or financial reorganisation,
and default or delinquency in payments (more than 30 days overdue) are
considered indicators that the trade receivable is impaired. The amount of the
provision is the difference between the asset's carrying amount and the present
value of estimated future cash flows, discounted at the original effective
interest rate. The carrying amount of the asset is reduced through use of an
allowance account, and the amount of the expected credit loss is recognised in
the Consolidated Statement of Comprehensive Income. When a trade receivable is
uncollectible, it is written off against the allowance account for trade
receivables. Subsequent recoveries of amounts previously written off are
credited in the Consolidated Statement of Comprehensive Income.
The Group loss allowance is based on expected credit loss as calculated using
the "provision matrix" approach and a forward-looking component based on
individual tenant profiles. The Group considers a financial asset to be in
default when the borrower is unlikely to pay its credit obligations to the
Group in full. The Group writes off trade receivables when there is no
reasonable expectation of recovery.
I Cash and cash equivalents
Cash and cash equivalents are defined as cash in hand, demand deposits, and
other short-term highly liquid investments readily convertible within three
months or less to known amounts of cash and subject to insignificant risk of
changes in value.
J Borrowings and interest expense
All loans and borrowings are initially recognised at the fair value of the
consideration received, less issue costs where applicable. After initial
recognition, all interest-bearing loans and borrowings are subsequently
measured at amortised cost. Amortised cost is calculated by taking into account
any discount or premium on settlement. Borrowing costs are recognised within
finance costs in the Consolidated Statement of Comprehensive Income as
incurred.
K Accounting for derivative financial instruments and hedging activities
Interest rate swaps are initially recognised at fair value on the date a
derivative contract is entered into and are subsequently remeasured at their
fair value. The method of recognising the resulting gain or loss depends on
whether the derivative is designated as a hedging instrument, and if so, the
nature of the item being hedged. The Group documents at the inception of the
transaction the relationship between hedging instruments and hedged items, as
well as its risk management objective and strategy for undertaking various
hedging transactions. The Group also documents its assessment both at hedge
inception and on an ongoing basis of whether the derivatives that are used in
hedging transactions are highly effective in off setting changes in fair values
or cash flows of hedged items. The effective portion of changes in the fair
value of derivatives that are designated and qualify as cash flow hedges are
recognised in other comprehensive income in the Consolidated Statement of
Comprehensive Income. The gains or losses relating to the ineffective portion
are recognised in operating profit in the Consolidated Statement of
Comprehensive Income.
Amounts taken to equity are transferred to profit or loss when the hedged
transaction affects profit or loss, such as when the hedged financial income or
financial expenses are recognised.
When a derivative is held as an economic hedge for a period beyond 12 months
after the end of the reporting period, the derivative is classified as
non-current consistent with the classification of the underlying item. A
derivative instrument that is a designated and effective hedging instrument is
classified consistent with the classification of the underlying hedged item.
L Service charge
The Group has appointed a managing agent to deal with the service charge at the
investment properties and the Group is acting as an agent for the service
charge and not a principal. As a result the Group recognises net service charge
and void expenses in the Consolidated Statement of Comprehensive Income.
Service charge that is payable by tenants is shown as income and a
corresponding expense in the Consolidated Statement of Comprehensive Income.
M Other financial liabilities
Trade and other payables are recognised and carried at invoiced value as they
are considered to have payment terms of 30 days or less and are not interest
bearing. The balance of trade and other payables are considered to meet the
definition of an accrual and have been expensed through the Income Statement or
Balance Sheet depending on classification. VAT payable at the Balance Sheet
date will be settled within 31 days of the Balance Sheet date with Her
Majesty's Revenue and Customs ("HMRC") and deferred rental income is rent that
has been billed to tenants but relates to the period after the Balance Sheet
date. Rent deposits recognised in note 12 are those that are due within one
year as a result of upcoming tenant expiries.
3 FINANCIAL RISK MANAGEMENT
The Group's principal financial liabilities are loans and borrowings. The main
purpose of the Group's loans and borrowings is to finance the acquisition and
development of the Group's property portfolio. The Group has rent and other
receivables, trade and other payables and cash and short-term deposits that
arise directly from its operations.
The Group is exposed to market risk (including interest rate risk and real
estate risk), credit risk, capital risk and liquidity risk. The Group is not
exposed to currency risk or price risk. The Group is engaged in a single
segment of business, being property investment in one geographical area, the
United Kingdom. Therefore the Group only engages in one form of currency being
pound sterling. The Group currently invests in direct non-listed property and
is therefore not exposed to price risk.
The Board of Directors reviews and agrees policies for managing each of these
risks which are summarised below.
Market risk
Market risk is the risk that the fair values of financial instruments will
fluctuate because of changes in market prices. The financial instruments held
by the Group that are affected by market risk are principally the interest rate
swap.
i) Interest Rate risk
The Group invests cash balances with RBS and Citibank. These balances expose
the Group to cash flow interest rate risk as the Group's income and operating
cash flows will be affected by movements in the market rate of interest. There
is considered to be no fair value interest rate risk in regard to these
balances.
The bank borrowings as described in note 13 also expose the Group to cash flow
interest rate risk. The Group's policy is to manage its cash flow interest rate
risk using interest rate swaps, in which the Group has agreed to exchange the
difference between fixed and floating interest amounts based on a notional
principal amount (see note 14). The Group has floating rate borrowings of £
110,000,000. The full £110,000,000 of these borrowings has been fixed via an
interest rate swap.
The bank borrowings are carried at amortised cost and the Group considers this
to be a close approximation to fair value. The fair value of the bank
borrowings is affected by changes in the market interest rate. The fair value
of the interest rate swap is exposed to changes in the market interest rate as
their fair value is calculated as the present value of the estimated future
cash flows under the agreements. The accounting policy for recognising the fair
value movements in the interest rate swaps is described in note 2.3.
Trade and other receivables and trade and other payables are interest free and
have settlement dates within one year and therefore are not considered to
present a fair value interest rate risk.
The tables below set out the carrying amount of the Group's financial
instruments excluding the amortisation of borrowing costs as outlined in note
13. Bank borrowings have been fixed due to an interest rate swap and is
detailed further in note 14:
At 31 December 2020 Fixed Rate Variable Rate Interest Rate
£ £
Cash and cash equivalents - 9,383,371 0.000%
Bank borrowings 110,000,000 - 2.725%
At 31 December 2019 Fixed Rate Variable Rate Interest Rate
£ £
Cash and cash equivalents - 6,475,619 0.020%
Bank borrowings 128,000,000 - 2.640%
At 31 December 2020, if market rate interest rates had been 100 basis points
higher, which is deemed appropriate given historical movements in interest
rates, with all other variables held constant, the profit for the year would
have been £93,834 higher (2019: £115,244 lower) as a result of the higher
interest income on cash and cash equivalents. Other Comprehensive Income and
the Capital Reserve would have been £2,507,886 higher (2019: £3,851,254 higher)
as a result of an increase in the fair value of the derivative designated as a
cash flow hedge of floating rate borrowings.
At 31 December 2020, if market rate interest rates had been 100 basis points
lower with all other variables held constant, the profit for the year would
have been £93,834 lower (2019: £115,244 higher) as a result of the lower
interest income on cash and cash equivalents. Other Comprehensive Income and
the Capital Reserve would have been £2,519,221 lower (2019: £3,898,889 lower)
as a result of a decrease in the fair value of the derivative designated as a
cash flow hedge of floating rate borrowings.
ii) Real estate risk
The Group has identified the following risks associated with the real estate
portfolio. The risks following, in particular b and c and also credit risk have
increased given the COVID-19 pandemic and the resultant effect on tenants'
ability to pay rent:
a) The cost of any development schemes may increase if there are delays in
the planning process. The Group uses advisers who are experts in the specific
planning requirements in the scheme's location in order to reduce the risks
that may arise in the planning process.
b) A major tenant may become insolvent causing a significant loss of rental
income and a reduction in the value of the associated property (see also credit
risk). To reduce this risk, the Group reviews the financial status of all
prospective tenants and decides on the appropriate level of security required
via rental deposits or guarantees.
c) The exposure of the fair values of the portfolio to market and occupier
fundamentals. The Group aims to manage such risks by taking an active approach
to asset management (working with tenants to extend leases and minimise voids),
capturing profit (selling when the property has delivered a return to the Group
that the Group believes has been maximised and the proceeds can be reinvested
into more attractive opportunities) and identifying new investments (generally
at yields that are accretive to the revenue account and where the Group
believes there will be greater investment demand in the medium term).
Credit risk
Credit risk is the risk that a counterparty will be unable to meet a commitment
that it has entered into with the Group. In the event of default by an
occupational tenant, the Group will suffer a rental income shortfall and incur
additional related costs. The Investment Manager regularly reviews reports
produced by Dun and Bradstreet and other sources, including the IPD IRIS
report, to be able to assess the credit worthiness of the Group's tenants and
aims to ensure that there are no excessive concentrations of credit risk and
that the impact of default by a tenant is minimised. In addition to this, the
terms of the Group's bank borrowings require that the largest tenant accounts
for less than 20% of the Group's total rental income, that the five largest
tenants account for less than 50% of the Group's total rental income and that
the ten largest tenants account for less than 75% of the Group's total rental
income. The maximum credit risk from the tenant arrears of the Group at the
financial year end was £6,019,917 (2019: £2,599,862) as detailed in note 10.
The Investment Manager also has a detailed process to identify the expected
credit loss from tenants who are behind with rental payments.
This involves a review of every tenant who owes money with the Investment
Manager using their own knowledge and communications with the tenant to assess
whether a provision should be made. This resulted in the provision for bad
debts increasing to £2.58 million at the year end (2019: £139,000).
With respect to credit risk arising from other financial assets of the Group,
which comprise cash and cash equivalents, the Group's exposure to credit risk
arises from default of the counterparty bank with a maximum exposure equal to
the carrying value of these instruments. As at 31 December 2020 £921,920 (2019:
£3,393,849) was placed on deposit with The Royal Bank of Scotland plc ("RBS"),
£7,749,473 (2019: £3,081,770) was held with Citibank and £711,978 (2019: £nil)
was held with Barclays. The credit risk associated with the cash deposits
placed with RBS is mitigated by virtue of the Group having a right to off-set
the balance deposited against the amount borrowed from RBS should RBS be unable
to return the deposits for any reason. Citibank is rated A-2 Stable by Standard
& Poor's and P-2 Stable by Moody's. RBS is rated A-1 Negative by Standard &
Poor's and P-1 Positive by Moody's. Barclays is rated A-1 Negative by Standard
& Poor's and P-1 Stable by Moody's.
Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulties in
realising assets or otherwise raising funds to meet financial commitments. The
investment properties in which the Group invests are not traded in an organised
public market and may be illiquid.
As a result, the Group may not be able to liquidate its investments in these
properties quickly at an amount close to their fair value in order to meet its
liquidity requirements.
The following table summarises the maturity profile of the Group's financial
liabilities based on contractual undiscounted payments.
The disclosed amounts for interest-bearing loans and interest rate swaps in the
below table are the estimated net undiscounted cash flows.
The Group's liquidity position is regularly monitored by management and is
reviewed quarterly by the Board of Directors.
Financial Liabilities
On demand 12 months 1 to 5 years >5 years Total
Year ended 31 December 2020 £ £ £ £ £
Interest-bearing loans - 1,565,575 112,168,436 - 113,734,011
Interest rate swaps - 1,431,925 1,789,906 - 3,221,831
Trade and other payables 4,986,275 26,068 104,271 2,632,853 7,749,467
Rental deposits due to tenants - 736,793 521,194 334,673 1,592,660
4,986,275 3,760,361 114,583,807 2,967,526 126,297,969
On demand 12 months 1 to 5 years >5 years Total
Year ended 31 December 2019 £ £ £ £ £
Interest-bearing loans - 20,387,418 115,371,691 - 135,759,109
Interest rate swaps - 610,082 1,372,685 - 1,982,767
Trade and other payables 3,177,865 26,068 104,271 2,658,921 5,967,125
Rental deposits due to tenants - 320,878 514,128 784,237 1,619,243
3,177,865 21,344,446 117,362,775 3,443,158 145,328,244
Capital risk
The Group's objectives when managing capital are to safeguard the Group's
ability to continue as a going concern in order to provide returns for
shareholders and benefits for other stakeholders and to maintain an optimal
capital structure to reduce the cost of capital.
In order to maintain or adjust the capital structure, the Group may adjust the
amount of dividends paid to shareholders, return capital to shareholders, issue
new shares, increase or decrease borrowings or sell assets to reduce debt.
The Group monitors capital on the basis of the gearing ratio. This ratio is
calculated as total borrowings divided by gross assets and has a limit of 65%
set by the Articles of Association of the Company. Gross assets are calculated
as non-current and current assets, as shown in the Consolidated Balance Sheet.
The gearing ratios at 31 December 2020 and at 31 December 2019 were as follows:
2020 2019
£ £
Total borrowings (excluding unamortised arrangement fees) 110,000,000 128,000,000
Gross assets 459,639,079 505,766,623
Gearing ratio (must not exceed 65%) 23.93% 25.31%
The Group also monitors the Loan to Value ratio which is calculated as gross
assets divided by gross borrowings less cash. As at 31 December 2020 this was
23.0% (2019: 24.6%).
Fair values
Set out below is a comparison by class of the carrying amounts and fair value
of the Group's financial instruments that are carried in the financial
statements.
Carrying Amount Fair Value
2020 2019 2020 2019
Financial Assets £ £ £ £
Cash and cash equivalents 9,383,371 6,475,619 9,383,371 6,475,619
Trade and other receivables 10,802,197 4,388,390 10,802,197 4,388,390
Financial Liabilities
Bank borrowings 109,542,823 127,316,886 113,000,998 130,066,813
Interest rate swaps 3,735,254 2,220,616 3,735,254 2,220,616
Trade and other payables 5,797,386 5,320,162 5,797,386 5,320,162
The fair value of trade receivables and payables are materially equivalent to
their amortised cost.
The fair value of the financial assets and liabilities are included at an
estimate of the price that would be received to sell a financial asset or paid
to transfer a financial liability in an orderly transaction between market
participants at the measurement date.
The following methods and assumptions were used to estimate the fair value:
. Cash and cash equivalents, trade and other receivables and trade and
other payables are the same as fair value due to the short-term maturities of
these instruments.
. The fair value of bank borrowings is estimated by discounting future cash
flows using rates currently available for debt on similar terms and remaining
maturities. The fair value approximates their carrying values gross of
unamortised transaction costs. This is considered as being valued at level 2 of
the fair value hierarchy and has not changed level since 31 December 2019.
. The fair value of the interest rate swap contract is estimated by
discounting expected future cash flows using current market interest rates and
yield curve over the remaining term of the instrument. This is considered as
being valued at level 2 of the fair value hierarchy and has not changed level
since 31 December 2019. The definition of the valuation techniques are
explained in the significant accounting judgements, estimates and assumptions
is in the Annual Report.
The table below shows an analysis of the fair values of financial instruments
recognised in the Balance Sheet by the level of the fair value hierarchy:
Year ended 31 December 2020 Level 1 Level 2 Level 3 Total fair
value
Interest rate swap - 3,735,254 - 3,735,254
Year ended 31 December 2019 Level 1 Level 2 Level 3 Total fair
value
Interest rate swap - 2,220,616 - 2,220,616
Level 1 Quoted (unadjusted) market prices in active markets for identical
assets or liabilities.
Level 2 Valuation techniques for which the lowest level input that is
significant to the fair value measurement is directly or indirectly observable.
Level 3 Valuation techniques for which the lowest level input that is
significant to the fair value measurement is unobservable.
Please see note 7 for details on the valuation of Investment properties.
4 FEES
Investment management fees
On 19 December 2003 Standard Life Investments (Corporate Funds) Limited ("the
Investment Manager") was appointed as Investment Manager to manage the property
assets of the Group. A new Investment Management Agreement ("IMA") was entered
into on 7 July 2014, appointing the Investment Manager as the AIFM
("Alternative Investment Fund Manager"). On 10 December 2018, the Investment
Manager contract was novated on the same commercial terms to Aberdeen Standard
Fund Managers Limited.
Until 30 June 2019, under the terms of the IMA the Investment Manager was
entitled to 0.75% of total assets up to £200 million; 0.70% of total assets
between £200 million and £300 million; and 0.65% of total assets in excess of £
300 million. From 1 July 2019, under the terms of the IMA the Investment
Manager is entitled to 0.70% of total assets up to £500 million; and 0.60% of
total assets in excess of £500 million. The total fees charged for the year
amounted to £3,198,519 (2019: £3,492,880). The amount due and payable at the
year end amounted to £779,737 excluding VAT (2019: £866,598 excluding VAT). In
addition the Company paid the Investment Manager a sum of £131,000 (2019: £
109,800) to participate in the Managers marketing programme and Investment
Trust share plan.
Administration, secretarial fees
On 19 December 2003 Northern Trust International Fund Administration Services
(Guernsey) Limited ("Northern Trust") was appointed administrator, secretary
and registrar to the Group. Northern Trust is entitled to an annual fee,
payable quarterly in arrears, of £65,000. Northern Trust is also entitled to
reimbursement of reasonable out of pocket expenses. Total fees and expenses
charged for the year amounted to £65,000 (2019: £65,000). The amount due and
payable at the year end amounted to £16,250 (2019: £16,250).
Valuer's fee
Knight Frank LLP ("the Valuers"), external international real estate
consultants, was appointed as valuers in respect of the assets comprising the
property portfolio. The total valuation fees charged for the year amounted to £
84,638 (2019: £97,668). The total valuation fee comprises a base fee for the
ongoing quarterly valuation, and a one off fee on acquisition of an asset. The
amount due and payable at the year end amounted to £18,602 excluding VAT (2019:
£20,960 excluding VAT).
The annual fee is equal to 0.017 percent of the aggregate value of property
portfolio paid quarterly.
Auditor's fee
At the year end date Deloitte LLP continued as independent auditor of the
Group. The audit fees for the year amounted to £118,400 (2019: £81,850) and
relate to audit services provided for the 2020 financial year. Deloitte LLP did
not provide any non- audit services in the year (2019: nil).
5 FINANCE INCOME AND COSTS
2020 2019
£ £
Interest income on cash and cash equivalents 3,896 15,856
Finance income 3,896 15,856
Interest expense on bank borrowings 2,479,388 2,986,775
Payments on interest rate swap 1,038,749 574,021
Amortisation of arrangement costs (see note 225,937 217,484
13)
Finance costs 3,744,074 3,778,280
Of the finance costs above, £339,797 of the interest expense on bank borrowings
and £282,462 of payments on interest rate swaps were accruals at 31 December
2020 and included in Trade and other payables.
6 TAXATION
UK REIT Status
The Group migrated tax residence to the UK and elected to be treated as a UK
REIT with effect from 1 January 2015. As a UK REIT, the income profits of the
Group's UK property rental business are exempt from corporation tax as are any
gains it makes from the disposal of its properties, provided they are not held
for trading or sold within three years of completion of development. The Group
is otherwise subject to UK corporation tax at the prevailing rate.
As the principal company of the REIT, the Company is required to distribute at
least 90% of the income profits of the Group's UK property rental business.
There are a number of other conditions that also require to be met by the
Company and the Group to maintain REIT tax status. These conditions were met in
the period and the Board intends to conduct the Group's affairs such that these
conditions continue to be met for the foreseeable future. Accordingly, deferred
tax is no longer recognised on temporary differences relating to the property
rental business.
The Company and its Guernsey subsidiary have obtained exempt company status in
Guernsey so that they are exempt from Guernsey taxation on income arising
outside Guernsey and bank interest receivable in Guernsey.
A reconciliation between the tax charge and the product of accounting profit
multiplied by the applicable tax rate for the year ended 31 December 2020 and
2019 is as follows:
2020 2019
£ £
Surplus before tax (15,782,067) 16,144,131
Tax calculated at UK statutory corporate tax rate of 19% (2019: 19%) (2,998,593) 3,067,385
UK REIT exemption on net income (3,166,216) (3,672,826)
Valuation (gain) in respect of investment properties not subject to tax 6,164,809 605,441
Current income tax charge - -
7 INVESTMENT PROPERTIES
UK Industrial UK Office UK Retail UK Other Total 2020
2020 2020 2020 2020 £
£ £ £ £
Market value at 1 January 252,800,000 163,305,000 42,270,000 34,800,000 493,175,000
Purchase of investment properties 5,099 623,074 20,669,581 - 21,297,754
Capital expenditure on investment properties 727,680 4,051,295 168,853 - 4,947,828
Opening market value of disposed investment (41,100,000) (10,700,000) (3,980,000) - (55,780,000)
properties
Valuation loss from investment properties (2,093,045) (15,149,700) (8,286,927) (2,110,552) (27,640,224)
Movement in lease incentives receivable 860,266 565,331 308,493 (39,448) 1,694,642
Market value at 31 December 211,200,000 142,695,000 51,150,000 32,650,000 437,695,000
Investment property recognised as held for sale - (4,300,000) - - (4,300,000)
Market value net of held for sale at 31 December 211,200,000 138,395,000 51,150,000 32,650,000 433,395,000
Right of use asset recognised on leasehold - 902,645 - - 902,645
properties
Adjustment for lease incentives (2,499,310) (2,209,756) (609,940) (566,264) (5,885,270)
Carrying value at 31 December 208,700,690 137,087,889 50,540,060 32,083,736 428,412,375
UK Industrial UK Office UK Retail UK Other Total
2019 2019 2019 2019 2019
£ £ £ £ £
Market value at 1 January 259,150,000 159,630,000 46,530,000 33,800,000 499,110,000
Purchase of investment properties 17,025,471 8,783,055 - - 25,808,526
Capital expenditure on investment properties 2,455,684 2,172,669 - - 4,628,353
Opening market value of disposed investment (29,540,000) (5,100,000) - - (34,640,000)
properties
Valuation loss from investment properties 3,274,144 (3,644,062) (4,256,539) 1,012,621 (3,613,836)
Movement in lease incentives receivable 434,701 1,463,338 (3,461) (12,621) 1,881,957
Market value at 31 December 252,800,000 163,305,000 42,270,000 34,800,000 493,175,000
Investment property recognised as held for sale - (10,700,000) - - (10,700,000)
Market value net of held for sale at 31 December 252,800,000 152,605,000 42,270,000 34,800,000 482,475,000
Right of use asset recognised on leasehold - 904,121 - - 904,121
properties
Adjustment for lease incentives (1,999,983) (2,616,679) (301,447) (605,713) (5,523,822)
Carrying value at 31 December 250,800,017 150,892,442 41,968,553 34,194,287 477,855,299
The valuations were performed by Knight Frank LLP, accredited external valuers
with recognised and relevant professional qualifications and recent experience
of the location and category of the investment properties being valued. The
valuation model in accordance with Royal Institute of Chartered Surveyors
('RICS') requirements on disclosure for Regulated Purpose Valuations has been
applied (RICS Valuation - Professional Standards January 2014 published by the
Royal Institution of Chartered Surveyors). These valuation models are
consistent with the principles in IFRS 13. The market value provided by Knight
Frank at the year end was £437,695,000 (2019: £493,175,000) however an
adjustment has been made for lease incentives of £5,885,270 (2019: £5,523,822)
that are already accounted for as an asset. In addition, as required under IFRS
16, a right of use asset of £902,645 has been recognised in respect of the
present value of future ground rents. As required under IFRS 16 an amount of £
902,645 has also been recognised as an obligation under finance leases in the
balance sheet. Valuation gains and losses from investment properties are
recognised in the Consolidated Statement of Comprehensive Income for the period
and are attributable to changes in unrealised gains or losses relating to
investment properties held at the end of the reporting period.
In the Consolidated Cash Flow Statement, proceeds from disposal of investment
properties comprise:
2020 2019
£ £
Opening market value of disposed investment properties 55,780,000 34,640,000
( Loss)/Profit on disposal of investment properties (4,806,137) 427,304
Net proceeds from disposal of investment properties 50,973,863 35,067,304
Valuation methodology
The fair value of completed investment properties are determined using the
income capitalisation method.
The income capitalisation method is based on capitalising the net income stream
at an appropriate yield. In establishing the net income stream the valuers have
reflected the current rent (the gross rent) payable to lease expiry, at which
point the valuer has assumed that each unit will be re-let at their opinion of
ERV. The valuers have made allowances for voids where appropriate, as well as
deducting non recoverable costs where applicable. The appropriate yield is
selected on the basis of the location of the building, its quality, tenant
credit quality and lease terms amongst other factors.
No properties have changed valuation technique during the year. At the Balance
Sheet date the income capitalisation method is appropriate for valuing all
assets.
The Group appoints suitable valuers (such appointment is reviewed on a periodic
basis) to undertake a valuation of all the direct real estate investments on a
quarterly basis. The valuation is undertaken in accordance with the then
current RICS guidelines and requirements as mentioned above.
The Investment Manager meets with the valuers on a quarterly basis to ensure
the valuers are aware of all relevant information for the valuation and any
change in the investment over the quarter. The Investment Manager then reviews
and discusses the draft valuations with the valuers to ensure correct factual
assumptions are made. The valuers report a final valuation that is then
reported to the Board.
The management group that determines the Company's valuation policies and
procedures for property valuations is the Property Valuation Committee. The
Committee reviews the quarterly property valuation reports produced by the
valuers (or such other person as may from time to time provide such property
valuation services to the Group) before its submission to the Board, focusing
in particular on:
. significant adjustments from the previous property valuation report;
. reviewing the individual valuations of each property;
. compliance with applicable standards and guidelines including those
issued by RICS and the UKLA Listing Rules;
. reviewing the findings and any recommendations or statements made by the
valuer;
. considering any further matters relating to the valuation of the
properties.
The Chairman of the Committee makes a brief report of the findings and
recommendations of the Committee to the Board after each Committee meeting. The
minutes of the Committee meetings are circulated to the Board. The Chairman
submits an annual report to the Board summarising the Committee's activities
during the year and the related significant results and findings.
All investment properties are classified as Level 3 in the fair value
hierarchy. There were no movements between levels during the year.
The table below outlines the valuation techniques and inputs used to derive
Level 3 fair values for each class of investment properties. The table
includes:
. The fair value measurements at the end of the reporting period.
. The level of the fair value hierarchy (e.g. Level 3) within which the
fair value measurements are categorised in their entirety.
. A description of the valuation techniques applied.
. Fair value measurements, quantitative information about the significant
unobservable inputs used in the fair value measurement.
. The inputs used in the fair value measurement, including the ranges of
rent charged to different units within the same building.
Country & Class Fair Value £ Valuation Technique Key Unobservable Input Range (weighted average)
UK Industrial 211,200,000 Income Capitalisation - Initial Yield 0.00% to 8.08% (5.54%)
Level 3 - Reversionary Yield 4.29% to 10.29% (6.26%)
- Equivalent Yield 4.26% to 8.55% (6.21%)
- Estimated rental value per sq £2.75 to £8.50 (£5.70)
ft
UK Office 142,695,000 Income Capitalisation - Initial Yield 0.00% to 13.36% (5.24%)
Level 3 - Reversionary Yield 5.32% to 10.01% (7.66%)
- Equivalent Yield 5.23% to 8.55% (7.11%)
- Estimated rental value per sq £10.25 to £111.00 (£25.54)
ft
UK Retail 51,150,000 Income Capitalisation - Initial Yield 4.79% to 8.49% (7.99%)
Level 3 - Reversionary Yield 5.12% to 7.84% (6.83%)
- Equivalent Yield 5.63% to 8.05% (7.43%)
- Estimated rental value per sq £8.35 to £90.00 (£15.53)
ft
UK Other 32,650,000 Income Capitalisation - Initial Yield 4.91% to 6.89% (5.90%)
Level 3 - Reversionary Yield 5.03% to 6.90% (5.80%)
- Equivalent Yield 5.01% to 6.91% (5.87%)
- Estimated rental value per sq £7.50 to £30.00 (£19.75)
ft
437,695,000
Descriptions and definitions
The table above includes the following descriptions and definitions relating to
valuation techniques and key observable inputs made in determining the fair
values.
Estimated rental value (ERV)
The rent at which space could be let in the market conditions prevailing at the
date of valuation.
Equivalent yield
The equivalent yield is defined as the internal rate of return of the cash flow
from the property, assuming a rise or fall to ERV at the next review or lease
termination, but with no further rental change.
Initial yield
Initial yield is the annualised rents of a property expressed as a percentage
of the property value.
Reversionary yield
Reversionary yield is the anticipated yield to which the initial yield will
rise (or fall) once the rent reaches the ERV.
The table below shows the ERV per annum, area per square foot, average ERV per
square foot, initial yield and reversionary yield as at the Balance Sheet date.
2020 2019
ERV p.a. £32,180,024 £34,224,876
Area sq ft 3,825,017 4,102,486
Average ERV per sq ft £8.41 £8.34
Initial Yield 5.8% 5.2%
Reversionary Yield 6.9% 6.7%
The table below presents the sensitivity of the valuation to changes in the
most significant assumptions underlying the valuation of completed investment
property. The Board believes these are reasonable sensitivities given historic
movements in valuations.
2020 2019
£ £
Increase in equivalent yield of 50 bps (34,483,590) (53,790,866)
Decrease of 5% in ERV (17,437,618) (23,968,000)
Below is a list of how the interrelationships in the sensitivity analysis above
can be explained. In both cases outlined in the sensitivity table the estimated
fair value would increase (decrease) if:
. The ERV is higher (lower)
. Void periods were shorter (longer)
. The occupancy rate was higher (lower)
. Rent free periods were shorter (longer)
. The capitalisation rates were lower (higher)
8 INVESTMENT PROPERTIES HELD FOR SALE
As at 31 December 2020, the Group was actively seeking a buyer for Interfleet
House, Derby. The Group both exchanged contracts and completed this sale on 8
January 2021 for a price of £4,346,000.
As at 31 December 2019, the Group was actively seeking a buyer for Bourne
House, Staines. The Group both exchanged contracts and completed this sale on 3
January 2020 for a price of £10,791,000.
9 INVESTMENT IN SUBSIDIARY UNDERTAKINGS
The Company owns 100 per cent of the issued ordinary share capital of Standard
Life Investments Property Holdings Limited, a company with limited liability
incorporated and domiciled in Guernsey, Channel Islands, whose principal
business is property investment.
In 2015 the Group acquired 100% of the units in Standard Life Investments
SLIPIT Unit Trust, (formerly Aviva Investors UK Real Estate Recovery II Unit
Trust) a Jersey Property Unit Trust. The acquisition included the entire issued
share capital of a General Partner which held, through a Limited Partnership, a
portfolio of 22 UK real estate assets. The transaction completed on 23 December
2015 and the Group has treated the acquisition as a Business Combination in
accordance with IFRS 3.
The Group undertakings consist of the following 100% owned subsidiaries at the
Balance Sheet date:
. Standard Life Investments Property Holdings Limited, a company with
limited liability incorporated in Guernsey, Channel Islands.
. Standard Life Investments (SLIPIT) Limited Partnership, a limited
partnership established in England.
. Standard Life Investments SLIPIT (General Partner) Limited, a company
with limited liability incorporated in England.
. Standard Life Investments SLIPIT (Nominee) Limited, a company with
limited liability incorporated and domiciled in England.
. Hagley Road Limited, a company with limited liability incorporated in
Jersey, Channel Islands.
10 TRADE AND OTHER RECEIVABLES
2020 2019
£ £
Trade receivables 8,603,476 2,738,455
Less: provision for impairment of trade receivables (2,583,559) (138,593)
Trade receivables (net) 6,019,917 2,599,862
Rental deposits held on behalf of tenants 736,793 320,878
Other receivables 4,045,487 992,779
Total trade and other receivables 10,802,197 3,913,519
The increase in other receivables is predominantly due to monies receivable
following the sale of the Industrial portfolio in December 2020 plus rental
income amounts due from JLL following the change in process from May 2020
whereby JLL invoice and collect the rents.
Reconciliation for changes in the provision for impairment of trade
receivables:
2020 2019
£ £
Opening balance (138,593) (99,395)
Charge for the year (2,444,966) (39,198)
Reversal of provision - -
Closing balance (2,583,559) (138,593)
The estimated fair values of receivables are the discounted amount of the
estimated future cash flows expected to be received and approximate their
carrying amounts.
The trade receivables above relate to rental income receivable from tenants of
the investment properties. When a new lease is agreed with a tenant the
Investment manager performs various money laundering checks and makes a
financial assessment to determine the tenant's ability to fulfil its
obligations under the lease agreement for the foreseeable future. The majority
of tenants are invoiced for rental income quarterly in advance and are issued
with invoices at least 21 days before the relevant quarter starts. Invoices
become due on the first day of the quarter and are considered past due if
payment is not received by this date. Other receivables are considered past due
when the given terms of credit expire.
Amounts are considered impaired when it becomes unlikely that the full value of
a receivable will be recovered. Movement in the balance considered to be
impaired has been included in other direct property costs in the Consolidated
Statement of Comprehensive Income. As at 31 December 2019, trade receivables of
£2,583,559 (2019: £138,593) were considered impaired and provided for.
If the provision for bad debts increased by £1 million then the Company's
earnings and net asset value would decrease by £1 million. If the provision for
bad debts decreased by £1 million then the Company's earnings and net asset
value would increase by £1 million.
The ageing of these receivables is as
follows:
2020 2019
£ £
0 to 3 months (252,550) (118,416)
3 to 6 months (705,740) (1,427)
Over 6 months (1,625,269) (18,750)
Closing balance (2,583,559) (138,593)
As of 31 December 2020, trade receivables of £6,019,917 (2019: £2,599,862)
were less than 3 months past due but considered not impaired.
11 CASH AND CASH EQUIVALENTS
2020 2019
£ £
Cash held at bank 8,461,451 3,081,770
Cash held on deposit with RBS 921,920 3,393,849
9,383,371 6,475,619
Cash held at banks earns interest at floating rates based on daily bank
deposit rates. Deposits are made for varying periods of between one day and
three months, depending on the immediate cash requirements of the Group, and
earn interest at the applicable short-term deposit rates.
12 TRADE AND OTHER PAYABLES
2020 2019
£ £
Trade and other payables 3,302,081 2,796,799
VAT payable 1,684,195 381,068
Deferred rental income 7,372,985 5,733,327
Rental deposits due to tenants 736,793 320,878
13,096,054 9,232,072
Trade payables are non-interest bearing and are normally settled on 30-day
terms.
13 BANK BORROWINGS
2020 2019
£ £
Loan facility and drawn down outstanding balance 110,000,000 130,000,000
Opening carrying value 127,316,886 129,249,402
Borrowings during the year 27,000,000 1,000,000
Repayment of RCF (45,000,000) (3,000,000)
Arrangements costs of additional facility - (99,997)
Amortisation of arrangement costs 225,937 167,481
Closing carrying value 109,542,823 127,316,886
On 28 April 2016 the Company entered into an agreement to extend £145 million
of its existing £155 million debt facility with RBS. The debt facility
consisted of a £110 million seven year term loan facility and a £35 million
five year RCF which was extended by two years in May 2018 with the margin on
the RCF now at LIBOR plus 1.45%. Interest is payable on the Term Loan at 3
month LIBOR plus 1.375% which equates to a fixed rate of 2.725% on the Term
Loan.
In June 2019, the Company also entered into a new arrangement with the Royal
Bank of Scotland International Limited (RBSI) to extend its Revolving Credit
Facility (RCF) by £20 million. This facility has a margin of 1.60% above LIBOR.
As at 31 December 2020 none of the RCF was drawn (2019: £20 million).
Under the terms of the loan facility there are certain events which would
entitle RBS to terminate the loan facility and demand repayment of all sums
due. Included in these events of default is the financial undertaking relating
to the LTV percentage. The loan agreement notes that the LTV percentage is
calculated as the loan amount less the amount of any sterling cash deposited
within the security of RBS divided by the gross secured property value, and
that this percentage should not exceed 60% for the period to and including 27
April 2021 and should not exceed 55% after 27 April 2021 to maturity.
2020 2019
£ £
Loan amount 110,000,000 128,000,000
Cash (9,383,371) (6,475,619)
100,616,629 121,524,381
Investment property valuation 437,695,000 493,175,000
LTV percentage 23.0% 24.6%
Other loan covenants that the Group is obliged to meet include the following:
. that the net rental income is not less than 150% of the finance costs for
any three month period;
. that the largest single asset accounts for less than 15% of the Gross
Secured Asset Value;
. that the largest ten assets accounts for less than 75% of the Gross
Secured Asset Value;
. that sector weightings are restricted to 55%, 45% and 55% for the Office,
Retail and Industrial sectors respectively;
. that the largest tenant accounts for less than 20% of the Group's annual
net rental income;
. that the five largest tenants account for less than 50% of the Group's
annual net rental income;
. that the ten largest tenants account for less than 75% of the Group's
annual net rental income.
During the year, the Group complied with its obligations and loan covenants
under its loan agreement.
The loan facility is secured by fixed and floating charges over the assets of
the Company and its wholly owned subsidiaries, Standard Life Investments
Property Holdings Limited and Standard Life Investments (SLIPIT) Limited
Partnership.
14 INTEREST RATE SWAP
As part of the refinancing of loans (see note 13), on 28 April 2016 the Group
completed an interest rate swap of a notional amount of £110,000,000 with RBS.
The interest rate swap effective date is 28 April 2016 and has a maturity date
of 27 April 2023. Under the swap the Company has agreed to receive a floating
interest rate linked to 3 month LIBOR and pay a fixed interest rate of 1.35%.
The Group has adopted the "interest rate benchmark reform" amendments in the
current financial year. These allow the Group to continue hedge accounting for
its benchmark interest rate exposure during the period of uncertainty arising
from interest rate benchmark reforms. The Group will continue to apply these
amendments until the uncertainty arising from interest rate benchmark reform is
no longer present with respect to the timing and amount of the interest rate
benchmark cash flows.
None of the Group's current LIBOR-linked contracts include fallback provisions
for a cessation of the referenced benchmark interest rate. The Group will look
to implement fallback language for different instruments and IBORs when
appropriate.
The Group has only one hedge instruments as noted above, for which the Group
has applied the "interest rate benchmark reform" amendments.
2020 2019
£ £
Opening fair value of interest rate swaps at 1 (2,220,616) (803,963)
January
Valuation (loss)/gain on interest rate swaps (1,514,638) (1,416,653)
Closing fair value of interest rate swaps at 31 (3,735,254) (2,220,616)
December
The split of the swap liability is listed below.
2020 2019
£ £
Current liabilities (1,472,387) (644,465)
Non-current liabilities (2,262,867) (1,576,151)
Interest rate swap with a start date of 28 April (3,735,254) (2,220,616)
2016 maturing on 27 April 2023
Please see the Annual Report for further EPRA disclosures.
15 OBLIGATIONS UNDER FINANCE LEASES
Minimum Present
lease value of
minimum
lease
payments Interest payments
2020 2020 2020
£ £ £
Less than one year 26,068 (24,552) 1,516
Between two and five years 104,271 (97,784) 6,487
More than five years 2,632,853 (1,738,211) 894,642
Total 2,763,192 (1,860,547) 902,645
Minimum Present
lease value of
minimum
lease
payments Interest payments
2019 2019 2019
£ £ £
Less than one year 26,068 (24,592) 1,476
Between two and five years 104,271 (97,956) 6,316
More than five years 2,658,921 (1,762,591) 896,329
Total 2,789,260 (1,885,139) 904,121
The above table shows the present value of future lease payments in relation to
the ground lease payable at Hagley Road, Birmingham as required under IFRS 16.
A corresponding asset has been recognised and is part of Investment properties
as shown in note 7.
16 LEASE ANALYSIS
The Group has granted leases on its property portfolio. This property portfolio
as at 31 December 2020 had an average lease expiry of six years and two months.
Leases include clauses to enable periodic upward revision of the rental charge
according to prevailing market conditions. Some leases contain options to break
before the end of the lease term.
Future minimum rentals receivable under non-cancellable operating leases as at
31 December are as follows:
2020 2019
£ £
Within one year 26,247,932 25,806,303
After one year, but not more than five years 98,059,956 79,140,128
More than five years 77,593,168 94,344,918
Total 201,901,056 199,291,349
The largest single tenant at the year end accounts for 5.6% (2019: 4.5%) of the
current annual passing rent.
17 SHARE CAPITAL
Under the Company's Articles of Incorporation the Company may issue an
unlimited number of ordinary shares of 1 pence each, subject to issuance limits
set at the AGM each year. As at 31 December 2020 there were 404,316,422
ordinary shares of shares rank equally for dividends and distributions and
carry one vote each. There are no restrictions concerning the transfer of
ordinary shares in the Company, no special rights with regard to control
attached to the ordinary shares, no agreements between holders of ordinary
shares regarding their transfer known to the Company and no agreement which
the Company is party to that affects its control following a takeover bid.
In February 2020 the Company issued a further 1 million shares raising £952,800
after costs.
Allotted, called up and fully paid:
2020 2019
£ £
Opening balance 227,431,057 227,431,057
Shares issued 960,000 -
Issue costs associated with new ordinary shares (7,200) -
Closing balance 228,383,857 227,431,057
Treasury Shares
In November 2020, the Company undertook a share buyback programme at various
levels of discount to the prevailing NAV. As at 31 December 2020 2,548,997
shares had been bought back at a cost of £1,450,787 after costs and are
included in the Treasury share reserve.
2020 2019
£ £
Opening balance - -
Bought back during the year 1,450,787 -
Closing balance 1,450,787 -
The number of shares in issue as at 31 December 2020/2019 is as follows:
2020 2019
Number of Number of
shares shares
Opening balance 405,865,419 405,865,419
Issued during the year 1,000,000 -
Bought back during the year and put into (2,548,997) -
Treasury
Closing balance 404,316,422 405,865,419
18 RESERVES
The detailed movement of the below reserves for the years to 31 December 2020
and 31 December 2019 can be found in the Consolidated Statement of Changes in
Equity.
Retained earnings
This is a distributable reserve and represents the cumulative revenue earnings
of the Group less dividends paid to the Company's shareholders.
Capital reserves
This reserve represents realised gains and losses on disposed investment
properties and unrealised valuation gains and losses on investment properties
and cash flow hedges since the Company's launch.
Other distributable reserves
This reserve represents the share premium raised on launch of the Company which
was subsequently converted to a distributable reserve by special resolution
dated 4 December 2003.
19 EARNINGS PER SHARE
Basic earnings per share amounts are calculated by dividing profit for the year
net of tax attributable to ordinary equity holders by the weighted average
number of ordinary shares outstanding during the year. As there are no dilutive
instruments outstanding, basic and diluted earnings per share are identical.
The earnings per share for the year is set out in the table below. In addition
one of the key metrics the Board considers is dividend cover.
This is calculated by dividing the net revenue earnings in the year (surplus
for the year net of tax excluding all capital items and the swaps breakage
costs) divided by the dividends payable in relation to the financial year. For
2020 this equated to a figure of 108% (2019: 100%).
The following reflects the income and share data used in the basic and diluted
earnings per share computations:
2020 2019
£ £
Surplus for the year net of tax (15,782,067) 16,144,131
2020 2019
£ £
Weighted average number of ordinary shares outstanding 406,650,268 405,865,419
during the year
Earnings per ordinary share (p) (3.88) 3.98
Profit for the year excluding capital items 16,664,294 19,330,662
EPRA earnings per share (p) 4.10 4.76
20 DIVIDS AND PROPERTY INCOME DISTRIBUTION GROSS OF INCOME TAX
Non Property Income Distributions 2020 £ 2019 £
0.561p per ordinary share paid in March 2020 relating to the quarter ending 31 2,284,011 507,333
December 2019 (2019: 0.125p)
0.238p per ordinary share paid in May 2020 relating to the quarter ending 31 968,340 1,923,802
March 2020 (2019: nil)
Property Income Distributions
0.629p per ordinary share paid in March 2020 relating to the quarter ending 31 2,557,687 4,322,467
December 2019 (2019: 1.065p)
0.952p per ordinary share paid in May 2020 relating to the quarter ending 31 3,873,359 4,829,798
March 2020 (2019: 1.19p)
0.714p per ordinary share paid in August 2020 relating to the quarter ending 30 2,905,019 4,829,798
June 2020 (2019: 1.19p)
0.714p per ordinary share paid in November 2020 relating to the quarter ending 2,905,019 2,905,996
30 September 2020 (2019: 0.716p)
15,493,435 19,319,194
On 26 Feb 2021 a dividend in respect of the quarter to 31 December 2020 of
0.714 pence per share was paid wholly as a property income dividend.
21 RECONCILIATION OF CONSOLIDATED NAV TO PUBLISHED NAV
The NAV attributable to ordinary shares is published quarterly and is based on
the most recent valuation of the investment properties.
2020 2019
Number of ordinary shares at the reporting 404,316,422 405,865,419
date
2020 2019
£ £
Total equity per audited consolidated 331,506,437 364,794,564
financial statements
NAV per share (p) 82.0 89.9
22 RELATED PARTY DISCLOSURES
Directors' remuneration
The Directors of the Company are deemed as key management personnel and
received fees for their services. Further details are provided in the
Directors' Total fees for the year were £236,953 (2019: £227,276) none of which
remained payable at the year end (2019: nil).
Aberdeen Standard Fund Managers Limited, as the Manager of the Group from 10
December 2018, (previously Standard Life Investments (Corporate Funds)
Limited), received fees for their services as investment managers. Further
details are provided in note 4.
2020 2019
Robert Peto 30,077 44,000
Sally-Ann Farnon - 17,850
Huw Evans 36,000 35,000
Mike Balfour 40,000 37,000
James Clifton-Brown 39,638 35,000
Jill May 36,000 28,135
Sarah Slater 36,000 3,455
Employers national insurance 18,737 16,276
contributions
236,452 216,716
Directors expenses 501 10,560
236,953 227,276
23 SEGMENTAL INFORMATION
The Board has considered the requirements of IFRS 8 'operating segments'. The
Board is of the view that the Group is engaged in a single segment of business,
being property investment and in one geographical area, the United Kingdom.
24 EVENTS AFTER THE BALANCE SHEET DATE
On 8 January 2021, the Company completed the sale of Interfleet House, Derby
for £4.30m.
On 26 Feb 2021 a dividend in respect of the quarter to 31 December 2020 of
0.714 pence per share was paid wholly as a property income dividend.
On 19 March 2021, the Company completed the sale of Valley Road, Bradford for £
2.65m.
On 26 March 2021 the Company completed the sale of Persimmon House, Dartford
for £3.1m.
Up to 23 April 2021 the Company bought back a further 7.4m shares for £4.5m.
On 20 April 2021 a fifth interim dividend of 0.381p per share was declared
payable on 18 May 2021.
This Annual Financial Report announcement is not the Company's statutory
accounts for the year ended 31 December 2020. The statutory accounts for the
year ended 31 December 2020 received an audit report which was unqualified.
The Annual Report will be posted to shareholders in May 2021 and will be
available by download from the Company's webpage (www.slipit.co.uk).
Please note that past performance is not necessarily a guide to the future and
that the value of investments and the income from them may fall as well as
rise. Investors may not get back the amount they originally invested.
All enquiries to:
The Company Secretary
Northern Trust International Fund Administration Services (Guernsey) Limited
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 3QL
Tel: 01481 745001
Fax: 01481 745051
For further information:-
Jason Baggaley - Real Estate Fund Manager, Aberdeen Standard Investments
Tel: 07801039463 or jason.baggaley@aberdeenstandard.com
Oli Lord - Deputy Fund Manager, Aberdeen Standard Investments
Tel: 07557938803 or oli.lord@aberdeenstandard.com
Graeme McDonald - Senior Fund Control Manager, Aberdeen Standard Investments
Tel: 07717543309 or graeme.mcdonald@aberdeenstandard.com
END
(END) Dow Jones Newswires
April 30, 2021 02:00 ET (06:00 GMT)
Abrdn Property Income (LSE:API)
Historical Stock Chart
From Jun 2024 to Jul 2024
Abrdn Property Income (LSE:API)
Historical Stock Chart
From Jul 2023 to Jul 2024
